As filed with the Securities and Exchange Commission on March 31, 1998
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3836437
(State of incorporation) (I.R.S. Employer Identification Number)
_________________________
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-4095
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________
JOHNATHAN LIEBERMANN
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-4094
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________________
With a copy to:
STEPHEN B. ESKO, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
__________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT, AS
DETERMINED BY MARKET CONDITIONS.
__________________________
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE
FOLLOWING BOX.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES
ACT OF 1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND
OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING BOX.
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING.
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING.
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434, PLEASE CHECK THE FOLLOWING BOX.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit Offering Price Fee
Asset Backed Securities . . . . . . . . . . . . . . . $1,000,000 100% $1,000,000 $295
</TABLE>
Estimated for the purpose of calculating the registration fee.
___________________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________ , 199_)
$
BEAR STEARNS HOME EQUITY LOAN TRUST 199_-_
( )
SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
The Home Equity Loan Asset-Backed Certificates, Series 199_-_
collectively, the "Certificates"), will consist of the Classes identified in
the chart below (the "Offered Certificates") as well as certain additional
Classes of Certificates which are not being offered for sale hereunder. The
Certificates will evidence in the aggregate the entire beneficial interest in
a trust (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"), ________________, as Servicer (the
"Servicer"), and __________, as Trustee and Back-Up Servicer (the "Trustee"
and the "Back-Up Servicer," respectively). The property of the Trust will
include assets composed of Primary Assets, which may include one or more
pools of (i) closed-end and/or revolving home equity loans (the "Home Equity
Loans"), secured generally by subordinate liens 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 generally by subordinate liens on one-
to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby, and (iii)
securities backed or secured by Home Equity Loans and/or Home Improvement
Contracts. The Home Equity Loans and the Home Improvement Contracts are
referred to herein as "Loan Group One" and "Loan Group Two", respectively.
The Home Equity Loans and the Home Improvement Contracts are collectively
referred to herein as the "Loans". The Trust also will include $__________
on deposit in the Pre-Funding Account which will be used to purchase
additional Home Equity Loans and Home Improvement Contracts prior to
________, 199_ as described herein and funds on deposit in the Capitalized
Interest Account.
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-14 AND IN THE PROSPECTUS ON PAGE 17 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 SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING HOME EQUITY LOANS ARE INSURED OR
GUARANTEED
BY ANY GOVERNMENTAL ENTITY, 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>
<S> <C> <C> <C> <C> <C>
Initial Certificate Pass-Through Price to Underwriting Proceeds to
Principal Balance Rate Public(1) Discount Depositor(1)(2)
Per Class A-1 Certificate . . . . $ % % % %
Per Class A-2 Certificate . . . . $ % % % %
Per Class A-3 Certificate . . . . $ (3) % % %
Total . . . . . . . . . . . . . . $ $ $ $
</TABLE>
__________________
(1) Plus accrued interest, if any, from ____________.
(2) Before deducting expenses, estimated to be $_________.
(3) The Class A-3 Certificates will bear interest at a variable rate which,
for any Distribution Date, will equal the lesser of (i) __% per annum
and (ii) the weighted average of the Remittance Rates (as defined
herein) of the Loans in Loan Group . The Certificate Rate for the
first Distribution Date is excepted to be approximately ___% per annum.
See "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. 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 _________, ____.
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is ________, ____.
(cover page continued)
Distributions of principal and interest on the Offered Certificates
will be made on the 25th 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 ___________. On each Distribution Date, holders of the Offered
Certificates will be entitled to receive, from and to the extent of funds
available in the related Distribution Account (as defined herein),
distributions with respect to interest and principal calculated as set forth
herein. The Offered Certificates will have the benefit of an irrevocable and
unconditional surety bond (the "Policy") issued by _____________ (the
"Certificate Insurer") pursuant to which the Certificate Insurer will
guarantee payments to the holders of the Offered Certificates as described
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 LOANS IN THE RELATED LOAN GROUP, 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 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 ("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 MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
OFFERED CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
_____________________________
The Certificates offered by this Prospectus Supplement constitute a
separate series of Securities being offered by the Depositor pursuant to its
Prospectus dated ________, 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.
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.
Trust
Bear Stearns Home Equity Loan Trust 199_-_ (the "Trust") will be
formed pursuant to a Pooling and Servicing Agreement (the
"Agreement"), to be dated as of ___________ (the "Cut-Off Date"),
among Bear Stearns Asset Backed Securities, Inc. as depositor (the
"Depositor"), ___________________, as servicer (together with any
successor in such capacity, the "Servicer"), and _________________,
as trustee (the "Trustee") and back-up servicer (the "Back-Up
Servicer"). The property of the Trust will include: one or more
pools of closed-end and/or revolving home equity loans (the "Home
Equity Loans"), secured generally by subordinate liens on one- to
four-family residential or mixed-use properties; home improvement
installment sales contracts and installment loan agreements (the
"Home Improvement Contracts") which are either unsecured or secured
generally by subordinate liens on one- to four-family residential
or mixed-use properties, or by purchase money security interests in
the home improvements financed thereby; securities backed or
secured by Home Equity Loans and/or Home Improvement Contracts.
The Home Equity Loans and the Home Improvement Contracts are
individually referred to herein as "Loan Group One" and "Loan Group
Two," respectively, and collectively as the "Loans"; securities
backed or secured by the Loans; payments in respect of the Loans
received on and after the Cut-Off Date; property that secured a
Mortgage Loan which has been acquired by foreclosure or deed in
lieu of foreclosure; rights under certain hazard insurance policies
covering the Mortgaged Properties; funds on deposit in the Pre-
Funding Account, the Capitalized Interest Account and the Spread
Account (each as defined below); the Depositor's rights under the
Purchase Agreement (as defined herein); and certain other property,
as described more fully herein. In addition, the Depositor has
caused the Certificate Insurer (as defined below) to issue an
irrevocable and unconditional surety bond (the "Policy") for the
benefit of the Holders of the Offered Certificates pursuant to
which it will guarantee payments to such Holders as described
herein.
Securities Offered
The Home Equity Loan and Home Improvement Contract Asset-Backed
Certificates, Series 199_-_ (the "Certificates") will consist of
the Class A-1, Class A-2 and Class A-3 Certificates (collectively,
the "Offered Certificates"), the Class I Certificates and the Class
R Certificates. Only the Offered Certificates are offered hereby.
Any information contained herein regarding the Class I or Class R
Certificates is included solely to permit a better understanding of
the Offered Certificates.
The Class A-1 and Class A-2 Certificates (collectively, the "Fixed
Rate Certificates") and the Class I Certificates are related to
Loan Group One (Home Equity Loans) and the Class A-3 Certificates
are related to Loan Group Two (Home Improvement Contracts). Each
Class of Offered Certificates represents the right to receive
payments of interest at the per annum rate (the "Certificate Rate")
described below 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
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 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 25th day of each month or, if
such 25th day is not a Business Day, on the succeeding Business Day
(each, a "Distribution Date"), commencing in ______________.
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. nor any
other affiliate of the Depositor, the Servicer, the Trustee or the
Seller has guaranteed or is otherwise obligated with respect to the
Certificates. See "THE DEPOSITOR" in the Prospectus.
Seller
____________________________. All of the Loans originally
delivered to the Trust (the "Initial Loans") were, and any
Subsequent Loans (as defined below) will be, originated by the
Seller or by an affiliate and acquired by the Seller in the
ordinary course of its business. The Loans will be acquired by the
Depositor in a privately negotiated transaction concurrently with
the delivery of such Loans to the Trust. The Seller's
corporate headquarters are located at ______________, and its
telephone number is _____________. See "THE SELLER AND THE
SERVICER" herein.
Servicer ______________________________________________. See "THE
SELLER AND THE SERVICER" herein.
Trustee and
Back-Up Servicer ____________, a ______________ organized under the
laws of __________, will act as trustee and back-up
servicer (the "Trustee" and the "Back-Up Servicer,"
respectively).
Cut-Off Date ____________.
Closing Date On or about ___________.
The Loans
The Loans consist of promissory notes or other evidences of
indebtedness (the "Mortgage Notes") secured generally by mortgages,
deeds of trust or other instruments (the "Mortgages") creating
subordinate liens primarily on one- to four-family residential or
mixed use properties (the "Mortgaged Properties"), and in the case
of the Home Improvement Contracts, by purchase money security
interests in the home improvements financed thereby. Certain of
the Home Improvement Contracts will be unsecured. The Loans bear
fixed or adjustable rates (each, a "Loan Rate"). Interest on each
fixed rate Mortgage Loan is calculated on the "simple interest"
method ("Simple Interest Loans"), and interest on each adjustable
rate Mortgage Loan is calculated on the "actuarial" method
("Actuarial Loans"). 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 Loans occur throughout the month. Except for
the Balloon Loans (defined herein) in Loan Group (ONE), the Loans
are fully amortizing.
The Loans will be divided into two Loan Groups. Loan Group One
will consist of fixed rate and/or adjustable rate Home Equity Loans
("ARMs"), and Loan Group Two will consist of fixed rate and/or
adjustable rate (ARM) Home Improvement Contracts. The Loan Rate
borne by each ARM is subject to adjustment annually on the date set
forth in the related Mortgage Note (each, a "Change Date") to equal
the sum of (i) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year, as made available by
the Federal Reserve Board as of the date __ days before the
applicable Change Date (the "Index") and (ii) the number of basis
points set forth in such Mortgage Note (the "Gross Margin"),
subject to rounding and to the effects of the Periodic Cap, the
applicable Lifetime Cap and the applicable Lifetime Floor. The
"Periodic Cap" limits changes in the Loan Rate for each ARM on each
Change Date to ___ basis points. The "Lifetime Cap" is the maximum
Loan Rate that may be borne by an ARM over its life and is equal to
the sum of (i) the initial Loan Rate for such ARM and (ii) ___
basis points. The "Lifetime Floor" is the minimum Loan Rate that
may be borne by an ARM over its life and is equal to the initial
Loan Rate for such ARM. The ARMs do not provide for negative
amortization. None of the ARMs has reached its initial Change
Date.
The "Principal Balance" of a Mortgage Loan (other than a Liquidated
Mortgage 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 Mortgage Loan, its principal balance as of the
applicable Subsequent Cut-Off Date), minus all collections credited
against the Principal Balance of such Mortgage Loan. The Principal
Balance of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds (as defined herein) will be zero.
With respect to any Distribution Date and Loan Group, the "Loan
Group Balance" will be equal to the aggregate of the Principal
Balances of all Loans in such Loan Group as of the first day of the
related Due Period. SEE "DESCRIPTION OF THE 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 $___________ will be deposited
in the Pre-Funding Account. Of such amount, approximately
$___________ will be used to purchase additional home equity loans,
home improvement installment sales contracts and installment loan
agreements secured by first or second liens on Mortgaged Properties
("Subsequent Loans") for deposit into the applicable Loan Group
and, if required, to make accelerated payments of principal on the
Fixed Rate Certificates and approximately $_________ will be used
to purchase Subsequent Loans for deposit into the applicable Loan
Group and, if required, to make accelerated payments of principal
on the Class A-3 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 $_______, (ii) an Event of Default under the
Agreement and (iii) ________ __, amounts on deposit in the Pre-
Funding Account may be withdrawn from time to time to acquire
Subsequent 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 as a prepayment of
principal of the Class A-1 and Class A-2 Certificates on a pro rata
basis, or on the Class A-3 Certificates, as applicable, based on
the remaining Pre-Funded Amount allocated to the related Loan
Group. ONLY FIXED RATE AND/OR ADJUSTABLE SUBSEQUENT HOME EQUITY
LOANS MAY BE ADDED TO LOAN GROUP ONE, AND ONLY FIXED AND/OR
ADJUSTABLE RATE SUBSEQUENT HOME IMPROVEMENT CONTRACTS MAY BE ADDED
TO LOAN GROUP TWO.
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) and the premium due on the Policy
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
Date
The Final Scheduled Distribution Dates for each of the respective
classes of Offered Certificates are as set forth below, although it
is anticipated that the actual final Payment Date for each Class of
Offered Certificates will occur significantly earlier than the
related Final Scheduled Distribution Date. See "Prepayment and
Yield considerations" herein.
Final Scheduled
Distribution Date
-----------------
Class A-1 Certificates
Class A-2 Certificates
Class A-3 Certificates
Interest
The Certificate Rate for each Class of Offered Certificates will be
as set forth or described on the cover page hereof. The
"Remittance Rate" for each Mortgage Loan in Loan Group Two will be
calculated monthly, and for any Distribution Date will equal the
Loan Rate for such Mortgage Loan at the beginning of the related
Due Period (defined below) minus the sum of (a) the Expense Fee
Rate (defined herein) and (b) the related Excess Spread Rate. The
"Excess Spread Rate" for any Mortgage Loan in Loan Group Two will
equal the excess of (x) the Gross Margin for such Mortgage Loan
less the Expense Fee Rate over (y) _____%. 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"). Holders of the Class I
Certificates will be entitled to receive on each Distribution Date,
to the extent funds are available therefor and concurrently with
distributions of interest on the Fixed Rate Certificates, interest
at the rate of _____% per annum accrued during the related Interest
Period on the Notional Balance of the Class I Certificates which,
for any Distribution Date, will equal the Loan Group Balance of
Loan Group One as of the first day of the related Due Period. The
amount of interest (as described above) payable with respect to a
Class of Offered Certificates or the Class I Certificates
constitutes the "Interest Remittance Amount" for such Class.
The "Interest Period" for each Distribution Date will be the
calendar month preceding the month in which such Distribution Date
occurs. Interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. See
"DESCRIPTION OF THE CERTIFICATES" herein.
Principal
As to any Loan Group and Distribution Date, the "Basic Principal
Amount" will equal the sum of (i) each payment of principal on a
Mortgage 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
and Home Improvement Contracts 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
Mortgage 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 Mortgage Loan purchased by the
Seller or the Servicer as required or permitted by the Agreement as
of the related Determination Date and (b) with respect to any
Defective Mortgage Loan for which the Seller substitutes an
Eligible Substitute Mortgage Loan as of the related Determination
Date, any excess of the Principal Balance of such Defective
Mortgage Loan over the Principal Balance of such Eligible
Substitute Mortgage Loan, plus the amount of any unreimbursed
Servicing Advances (defined herein) made by the Servicer with
respect to the Mortgage Loan to the extent received.
Distributions of principal of a Class of Offered Certificates will
be measured by the Basic Principal Amount for the related Loan
Group. 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 for the related
Loan Group and (y) the portion of such Basic Principal Amount
required to be distributed to increase the Overcollateralization
Amount (defined below) for the related Loan Group to the Required
Overcollateralization Amount (defined below) for such Loan Group,
(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, allocable to the related
Loan Group 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 Mortgage 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
and Crosscollateralization
On any Distribution Date on which the Overcollateralization Amount
for a Loan Group is less than the Required Overcollateralization
Amount for such Loan Group, the Remaining Net Excess Spread for
such Loan Group plus the Available Transfer Cashflow and the Net
Excess Principal, if any, will be used to make additional
distributions of principal of the related Class or Classes of
Offered Certificates ("Additional Principal") until such
Overcollateralization Amount equals the related Required
Overcollateralization Amount.
As to any Loan Group and Distribution Date, the
"Overcollateralization Amount" will equal the sum of (a) the
excess, if any, of (i) the sum of the Loan Group Balance and the
amount on deposit in the Pre-Funding Account allocated to such Loan
Group (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 Class Certificate Balance of the related Class or
Classes of Offered Certificates, after giving effect to the
distributions of the related Principal Remittance Amount on such
Distribution Date, and (b) the amount, if any, on deposit in the
Spread Account allocated to the related Class or Classes of Offered
Certificates.
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 Loans in the Trust, (ii) be increased by the Certificate
Insurer at the end of the Pre-Funding Period, (iii) step down based
on the passage of time and the amortization of the Loans in the
Trust or (iv) be reduced or eliminated by the Certificate Insurer
so long as a Certificate Insurer Default (as defined herein) has
not occurred.
As to any Distribution Date and Loan Group: (a) the "Excess Spread"
will equal interest collected or advanced on the Loans in such Loan
Group (including amounts allocated to the related Class or Classes
of Offered Certificates in the Capitalized Interest Account) minus
the sum of (i) the Interest Remittance Amount for the related Class
or Classes of Offered Certificates and, in the case of Loan Group
One, the Interest Remittance Amount for the Class I Certificates,
(ii) the Servicing Fee, (iii) the Back-Up Servicing Fee, (iv) the
Trustee Fee and (v) the Premium Fee (the sum of clauses (ii)
through (v), the "Expense Fees"); (b) the "Net Excess Spread" will
equal the Excess Spread remaining after the application thereof to
cover an Available Funds Shortfall with respect to the related Loan
Group; (c) "Remaining Net Excess Spread" will equal the Net Excess
Spread remaining after the application thereof to cover an
Available Funds
Shortfall with respect to the other Loan Group and will be used to
make payments of Additional Principal to the Class or Classes of
Offered Certificates related to such original Loan Group; (d) the
"Available Transfer Cashflow" will equal the Remaining Net Excess
Spread for the other Loan Group after the application thereof to
the payment of Additional Principal to the Class or Classes of
Offered Certificates related to such other Loan Group; (e) the
"Excess Principal" will equal the lesser of (i) the portion of the
Basic Principal Amount for such Loan Group which is not required to
be included in the Principal Remittance Amount for the related
Class or Classes of Offered Certificates on such Distribution Date
and (ii) the amount of such portion remaining after the application
of the related Available Remittance Amount to the Required Payments
for such Loan Group; (f) the "Net Excess Principal" will equal the
Excess Principal remaining after the application thereof to cover
an Available Funds Shortfall in the other Loan Group; (g) an
"Available Funds Shortfall" is the amount by which the Available
Remittance Amount for a Loan Group is less than the related
Required Payments, and (h) the "Required Payments" equal the sum of
the related Expense Fees (other than the Servicing Fee), the
Interest Remittance Amount(s), the Principal Remittance Amount and
reimbursement of amounts due the Certificate Insurer with respect
to such Loan Group.
Spread Account
On the Closing Date the Trustee will establish and thereafter
maintain an account (the "Spread Account"). If required by the
Certificate Insurer, the holder of the Class R Certificates will
deliver to the Trustee for deposit in the Spread Account the amount
required by the Certificate Insurer. Funds on deposit in the
Spread Account, if any, will be available for withdrawal to fund
any shortfalls between the available funds for distribution to
Holders of the Offered Certificates and the related Interest
Remittance Amounts or Principal Remittance Amounts.
The Certificate Insurer
_____________ (the "Certificate Insurer") is a ______________
engaged only in the business of writing financial guaranty and
surety insurance. The Certificate Insurer insures structured
asset-backed, corporate, municipal and other financial obligations
in the domestic and foreign capital markets. The Certificate
Insurer's claims-paying ability is rated AAA by Standard & Poor's
Corporation and Aaa by Moody's Investors Service, Inc. ("Moody's").
See "THE POLICY AND THE CERTIFICATE INSURER" herein.
Pursuant to the Insurance and Reimbursement Agreement, dated as of
the Cut-Off Date (the "Insurance Agreement"), among the Certificate
Insurer, the Depositor, the Seller and the Servicer, the
Certificate Insurer will issue a financial guaranty insurance
policy (the "Policy") pursuant to which it will irrevocably and
unconditionally guaranty, among other things, payment on each
Distribution Date to the Trustee for the benefit of the Holders of
each Class of Offered Certificates of the Guaranteed Interest
Payment Amount and the Guaranteed Principal Payment Amount. The
terms of the Offered Certificates and the Agreement may not be
amended unless the Certificate Insurer has given its prior written
consent.
So long as there does not exist a failure by the Certificate
Insurer to make a required payment under the Policy (such event, a
"Certificate Insurer Default"), the Certificate Insurer will have
the right to exercise all rights of the Holders of the Offered
Certificates under the Agreement without any consent of such
Holders, and such Holders may exercise such rights only with the
prior written consent of the Certificate Insurer except as provided
in the Agreement.
Servicing
The Servicer will be responsible for servicing, managing and making
collections on the Loans. The Servicer will deposit all
collections in respect of the Home Equity Loans and/or Home
Improvement Contracts in a Loan Group into the related Collection
Account as described herein. Not later than the 18th day of the
month (or if such 18th day is not a Business Day, the preceding
Business Day) of each Distribution Date (the "Determination Date"),
the Trustee will calculate the amounts to be paid, as described
herein, to the Certificateholders 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 Loans actually
received, a portion of such payments as a monthly servicing fee
(the "Servicing Fee") in the amount of ___% per annum (the
"Servicing Fee Rate") on the Principal Balance of each Mortgage
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 Back-Up
Servicer or a third-party servicer will be appointed as a successor
Servicer. See "DESCRIPTION OF THE CERTIFICATES--Certain Matters
Regarding the Servicer" herein.
Monthly 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 applicable Collection Account
an amount equal to the sum of (a) interest accrued on each Mortgage
Loan through the date on which the related monthly payment was due
(the "Due Date") but not received by the Servicer as of the close
of business on the related Determination Date, net of the Servicing
Fee and (b) with respect to each REO Property which was acquired
during or prior to the related Due Period and as to which a final
disposition thereof did not occur during the related Due Period, an
amount equal to the excess, if any, of interest for the most
recently ended Due Period on the Principal Balance of the Mortgage
Loan related to such REO Property at the related Loan Rate, net of
the Servicing Fee, over the net income from the REO Property
transferred to such Collection Account for such Distribution Date
pursuant to the Agreement (the "Monthly Advance"). The Servicer is
not required to make any Monthly Advances which it determines 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 prior to the related
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
Mortgage 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 Mortgage Loan at the Loan Rate (or at such lower rate as may
be in effect for such Mortgage 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 Mortgage Loan as a result of a bankruptcy
proceeding (a "Debt Service Reduction")) minus the Servicing Fee
for such Mortgage 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 and Home Improvement
Contracts, the "Prepayment Interest Shortfall").
Optional Termination by
the Servicer
On any Distribution Date on which the aggregate of the Loan Group
Balances (the "Pool Balance") is less than ___ of the sum of (i)
the Pool Balance as of the Cut-Off Date and (ii) the Principal
Balance of the Subsequent Loans as of their respective Subsequent
Cut-Off Dates, the Servicer will have the option to purchase, in
whole, the Home Equity Loans, the Home Improvement Contracts and
the related REO Property, if any, remaining in the Trust. See
"DESCRIPTION OF THE CERTIFICATES -- Termination; Retirement of the
Certificates" herein.
Optional Purchase of
Defaulted Loans
The Servicer has the option, but is not obligated, to purchase from
the Trust any Loan ___ 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, plus all unreimbursed
amounts owing to the Certificate Insurer with interest thereon at
the rate referred to in the Insurance Agreement. See "DESCRIPTION
OF THE CERTIFICATES--Optional Purchase of Defaulted Loans" herein.
Certain Material 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" (the "REMIC"). The Offered Certificates will constitute
"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 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 on their issue price, be treated as having been issued
with original issue discount for federal income tax purposes. For
further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "CERTAIN MATERIAL
FEDERAL INCOME TAX CONSEQUENCES" 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
accounts 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 (collectively, "Plan(s)"),
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. Section 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. One such exemption is Prohibited Transaction
Exemption 90-30, subject to the satisfaction of the requirements
thereof. 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" in the Prospectus.
Certificate Rating
It is a condition to the issuance of each Class of Offered
Certificates that they be rated not lower than _____ by Standard &
Poor's, a division of The McGraw Hill Companies ("S&P") and _______
Moody's (each a "Rating Agency"). A security rating is not a
recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the assigning rating
agency. In addition, a security rating does not address or assess
the frequency or likelihood of prepayments on the 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.
RISK FACTORS
Investors should consider, among other things, the following 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 Seller,
the Servicer, the Trustee or any of their respective affiliates. The Offered
Certificates will be payable solely from the Trust. There will be no
recourse to the Depositor, 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 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 Loans are insured or guaranteed by any
government agency or instrumentality.
Second Mortgages Include Additional Risks. Approximately __% of the
Home Equity Loans and approximately __% of the Home Improvement Contracts by
aggregate principal balance are secured by second mortgages, which are
subordinate to the rights of the mortgagee 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 such
junior mortgage 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, a junior mortgagee may not foreclose on the
Mortgaged Property securing a junior 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. In addition, approximately __% of the Home Improvement Contracts
are secured by purchase money security interests and approximately __% of the
Home Improvement Contracts are unsecured.
Liquidation expenses with respect to defaulted mortgage 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 or home improvement contract
having a small remaining principal balance as it would in the case of a
defaulted mortgage 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 mortgage loan than would be
the case with a larger loan. Because the average outstanding principal
balances of the 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 Loans may also be smaller as a percentage of the
principal amount of the Loans than would be the case with respect to a
typical pool of conventional first mortgage loans.
There are several factors that could adversely affect the value of
Mortgaged Properties such that the outstanding balance of the related
Mortgage Loan, together with any senior financing on the Mortgaged
Properties, would equal or exceed the value of the Mortgaged Properties.
Among the factors that could adversely affect the value of the Mortgaged
Properties are an overall decline in the residential real estate market in
the areas in which the Mortgaged Properties are located or a decline in the
general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged 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 Mortgaged 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.
Prepayments May Fluctuate. All of the Loans may be prepaid in whole or
in part at any time without penalty. Home equity loans and home improvement
contracts, such as the Home Equity Loans and the Home Improvement Contracts
have been originated in significant volume only during the past few years and
the Depositor is not aware of any publicly available studies or statistics on
the rate of prepayment of such loans. Generally, home equity loans and home
improvement contracts are not viewed by borrowers as permanent financing.
Accordingly, the Home Equity Loans and the Home Improvement Contracts may
experience a higher rate of prepayment than traditional 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 and homeowner mobility. In addition,
all of the Loans contain due-on-sale provisions and the Servicer is obligated
to enforce such provisions unless such enforcement is not permitted by
applicable law.
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, 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.
Payments on the Loans May Vary. When a principal prepayment in full is
made on a Mortgage Loan, the Mortgagor is charged interest only up to the
date of such prepayment, instead of for a full month. In addition, all of
the fixed rate Loans are Simple Interest Loans pursuant to which interest is
computed and charged to the Mortgagor on the outstanding principal balance of
the related Mortgage Loan based on the number of days elapsed between the
date through which interest was last paid on the Mortgage Loan to receipt of
the Mortgagor's most current payment, and the portions of each monthly
payment that are allocated to interest and principal are adjusted based on
the actual amount of interest charged on such basis. Consequently, if less
than a full month has elapsed between the interest paid to date and the next
payment on a Simple Interest Loan, the amount of interest actually paid by
the Mortgagor will be less than a full month's interest on the principal
balance of such Mortgage Loan. Conversely, if more than a full month has
elapsed between payments on a Simple Interest Loan, the amount of interest
actually paid by the Mortgagor will be greater than a full month's interest
on the principal balance of such Mortgage Loan.
Each ARM will be serviced as an Actuarial Loan. Actuarial Loans provide
that interest is charged to each related Mortgagor, and payments are due
therefrom, as of a scheduled day in each month that is fixed at the time of
origination. Scheduled monthly payments by a Mortgagor on an Actuarial Loan
either earlier or later than the scheduled due date therefor will not affect
the amortization schedule or the relative application of such payment to
principal and interest.
Balloon Loans May Adversely Affect Distributions. Approximately _____%
by aggregate Principal Balance as of the Cutoff Date of the Initial Home
Equity Loans in Loan Group One and approximately __% of the Initial Home
Improvement Contracts in Loan Group Two have original terms to stated
maturity of up to ___ years and amortization schedules of up to ___ years
("Balloon Loans"), leaving a substantial payment due at the stated maturity
(each, a "Balloon Payment"). The ability of a Mortgagor/Borrower to repay a
Balloon Loan at maturity frequently will depend on such
Mortgagor's/Borrower's ability to refinance the Mortgage Loan. The ability
of a Mortgagor/Borrower to refinance such a Mortgage 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/Borrower's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor/Borrower, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a Balloon Payment, the receipt and reinvestment by Certificateholders of
the proceeds in such an environment may produce a lower return than that
previously received in respect of the related Mortgage Loan. Conversely, a
high interest rate environment may make it more difficult for the
Mortgagor/Borrower to accomplish a refinancing and may result in
delinquencies or defaults. None of the Depositor, the Seller, the Servicer
or the Trustee will be obligated to provide funds to refinance any Mortgage
Loan.
The Pre-Funding May Adversely Affect Investment. If the principal
amount of eligible Loans available during the Pre-Funding Period is less than
_____% of the original Pre-Funded Amount, the Depositor will have
insufficient 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.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria set
forth in the Agreement. However, Subsequent Loans may be originated or
purchased by the Seller using credit criteria different from those which were
applied to the Initial Loans and may be of a different credit quality.
Therefore, following the transfer of Subsequent Loans to a Loan Group, the
aggregate characteristics of the Loans then held by the Trust as part of such
Loan Group may vary from those of the Initial Loans in such Loan Group.
The ability of the Trust to invest in Subsequent Loans is largely
dependent upon whether the Seller is able to originate or purchase home
equity loans, home improvement installment sales contracts or installment
loan agreements which meet the requirements for transfer to the Trust under
the Agreement. The ability of the Seller to originate or purchase such
mortgage loans is affected by a variety of social and economic factors.
Economic factors include interest rates, unemployment levels, the rate of
inflation and consumer perception of economic conditions generally.
Underwriting Standards May Affect Performance. As described herein,
_____________'s underwriting standards generally are less stringent than
those of FNMA or FHLMC with respect to a borrower's credit history and in
certain other respects. A borrower's past credit history may not preclude
__________ from making a loan; however, it will reduce the size (and
consequently the Combined Loan-to-Value Ratio) of the loan that ___________
is willing to make. As a result of this approach to underwriting, the Loans
in the Trust may experience higher rates of delinquencies, defaults and
foreclosures than mortgage loans underwritten in a more traditional manner.
Geographic Concentration May Adversely Affect Performance.
Approximately _____% and _____% (by Principal Balance as of the Cutoff Date)
of the Initial Home Equity Loans in Loan Group One and the Initial Home
Improvement Contracts in Loan Group Two, respectively, are secured by
Mortgaged Properties located in . To the extent that the region 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 Loans may be expected to exacerbate
the foregoing risks. The Depositor can neither quantify the impact of any
recent property value declines on the Loans nor predict whether, to what
extent or for how long such declines may continue.
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 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 may be required to be forwarded by the Trustee to DTC and, in
such a case, 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 Class of 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 Home Improvement Contracts 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 may result in a reduction
in the rating of such Certificates. The rating by the Rating Agencies of the
Offered Certificates is not a recommendation to purchase, hold or sell the
Offered Certificates, inasmuch as such rating does 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.
DESCRIPTION OF THE LOANS
GENERAL
The Initial Loans were, and any Subsequent Loans will be, originated by
the Seller or an affiliate in accordance with the policies set forth under
"_________'S HOME EQUITY AND HOME IMPROVEMENT LOAN PROGRAM." All of the
Initial Loans are, and all Subsequent Loans will be, home equity loans
bearing fixed or adjustable 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 Loans are secured by either first or second mortgages or deeds of
trust on Mortgaged Properties located in _____ states. The Mortgaged
Properties securing the Loans consist primarily of one- to four-family
residential or mixed-use properties including townhouses and individual units
in condominiums and planned unit developments. The Mortgaged Properties may
be owner-occupied (which includes second and vacation homes) and non-owner
occupied investment properties. Certain of the Home Improvement Contracts
are unsecured or secured by purchase money security interests in the home
improvements financed thereby.
Certain Mortgage Loans (including Subsequent Loans, if any) will be a
Simple Interest Loan bearing interest at a fixed rate. Certain of the Loans
will have original terms to stated maturity of up to __ years and
amortization schedules of up to __ years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment").
Certain other Mortgage Loans (including Subsequent Loans, if any) will
bear interest at an adjustable rate and will be serviced as an Actuarial
Loan. The Loan Rate borne by each ARM is subject to adjustment ___________
on the date set forth in the related Mortgage Note (each, a "Change Date") to
equal the sum of (i) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year, as made available by the Federal
Reserve Board as of the date __ days before the applicable Change Date (the
"Index") and (ii) the number of basis points set forth in such Mortgage Note
(the "Gross Margin"), subject to rounding and to the effects of the Periodic
Cap, the applicable Lifetime Cap and the applicable Lifetime Floor. The
"Periodic Cap" limits changes in the Loan Rate for each ARM on each Change
Date to ___ basis points. The "Lifetime Cap" is the maximum Loan Rate that
may be borne by an ARM over its life and is equal to the sum of (i) the
initial Loan Rate for such ARM and (ii) ___ basis points. The "Lifetime
Floor" is the minimum Loan Rate that may be borne by an ARM over its life and
is equal to the initial Loan Rate for such ARM. The ARMs do not provide for
negative amortization.
STATISTICAL INFORMATION
Set forth below is certain summary statistical information regarding the
Initial Loans expected to be included in their respective Loan Groups as of
the Closing Date. All such information is approximate and is given as of the
Cutoff Date. More detailed statistical information is set forth in Appendix
A. Prior to the Closing Date, Loans may be removed from their respective
Loan Groups and other Loans may be substituted therefor. In addition,
regularly scheduled payments on the Loans will affect the balances and
percentages set forth below and in Appendix A, and Loans may be prepaid at
any time. As a result, certain characteristics of the Loans in one or both
Loan Groups may vary from the characteristics set forth below and in Appendix
A as of the Cutoff Date.
HOME EQUITY LOANS -- LOAN GROUP ONE. With respect to the Initial Group
One Home Equity Loans as of the Cutoff Date: the Principal Balances ranged
from $________ to $____________; the average Principal Balance was
$__________; the Loan Rates ranged from ____% to ____%; the weighted average
Loan Rate was ______%; the original Combined Loan-to-Value Ratios ranged from
___% to ___%; the weighted average original Combined Loan-to-Value Ratio was
______%; the remaining terms to stated maturity of the Balloon Loans ranged
from ___ months to ____ months; the weighted average remaining term to stated
maturity of the Balloon Loans was _______ months; the remaining terms to
stated maturity of the non-Balloon Loans ranged from ___ months to ___
months; the weighted average remaining term to stated maturity of the non-
Balloon Loans was ____ months; approximately _____% of the Group One Home
Equity Loans are Balloon Loans; the number of months since funding ranged
from __ months to ___ months; the weighted average number of months since
funding was ____ months; and no more than ____% of the Initial Group One Home
Equity Loans will be secured by Mortgaged Properties located in any one
postal zip code area.
HOME IMPROVEMENT CONTRACTS -- LOAN GROUP TWO. With respect to the
Initial Group Two Home Improvement Contracts as of the Cutoff Date: the
Principal Balances ranged from $_________ to $________; the average Principal
Balance was $________; the current Loan Rates ranged from ______% to
_______%; the weighted average current Loan Rate was ______%; the original
Combined Loan-to-Value Ratios ranged from ____% to ____%; the weighted
average original Combined Loan-to-Value Ratio was ___%; the remaining terms
to stated maturity ranged from ___ months to ___ months; the weighted average
remaining term to stated maturity was _____ months; the number of months
since funding ranged from __ months to __ months; the weighted average number
of months since funding was ___ months; the Gross Margins ranged from ____%
to ______%; the weighted average Gross Margin was ______%; the Lifetime
Floors ranged from ____% to ______%; the weighted average Lifetime Floor was
______%; the Lifetime Caps ranged from ______% to ________%; the weighted
average Lifetime Cap was _____%; the weighted average number of months to the
next Change Date was ______ months; and no more than ____% of the Initial
Group Two Home Improvement Contracts are secured by Mortgaged Properties
located in any one postal zip code area.
SUBSEQUENT LOANS
The Depositor expects to sell Subsequent Loans to the Trust during the
Pre-Funding Period for inclusion in the applicable Loan Group. The purchase
price for each Subsequent Mortgage 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 Mortgage 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 allocated to the applicable Loan Group. The
Subsequent Loans will have been originated more recently than, and may have
other characteristics which differ from, the Loans initially included in the
respective Loan Groups. As a result, following any sale of Subsequent Loans
to the Trust, the description of the Loan Groups set forth above and in
Appendix A may not accurately reflect the characteristics of all of the Loans
and Subsequent Loans in such Loan Groups. However, the Subsequent Loans must
conform to the representations and warranties set forth in the Agreement.
Following the end of the Pre-Funding Period, the Depositor expects that the
Loans (including Subsequent Loans) in Loan Group One and Loan Group Two will
have the following approximate characteristics.
LOAN GROUP ONE
<TABLE>
<CAPTION>
<S> <C>
Average Unpaid Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least $______
Weighted Average Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____% - _____%
Weighted Average Remaining Term to Stated Maturity . . . . . . . . . . . . . . . . . . . __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . not more than __%
Weighted Average Loan Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 month - __ month
Loans Secured by Primary Residences . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least __%
Single Family Detached . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least __%
State Distribution
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
Any other individual state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
</TABLE>
LOAN GROUP TWO
<TABLE>
<CAPTION>
<S> <C>
Average Unpaid Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least $______
Weighted Average Initial Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____% - _____%
Weighted Average Remaining Term to Stated Maturity . . . . . . . . . . . . . . . . . . . __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . not more than __%
Weighted Average Loan Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 month - __ months
Weighted Average Gross Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least __%
Loans Secured by Primary Residences . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least __%
Single Family Detached . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . at least __%
State Distribution
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
Any other individual state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
</TABLE>
THE SELLER AND THE SERVICER
_____________ (the "Seller") is a ____________ which originates home
equity loans, home improvement installment sales contracts and installment
loan agreements secured by subordinate liens primarily on one- to four-family
residential and mixed use properties, including townhouses and individual
units in condominiums and planned unit developments. The Seller conducts its
business directly and through ____ affiliated companies.
For the three fiscal years ended ______________, the Seller funded $____
million, $___ million and $____ million, respectively, of mortgage loans.
For the three months ended ___________, the Seller funded approximately $____
million of mortgage loans.
As of _________, the Seller had approximately ___ employees. The
principal offices of the Seller are located at __________________________.
Its telephone number is ____________.
HOME EQUITY AND HOME IMPROVEMENT LOAN PROGRAM
GENERAL
One of the Seller's products is a closed end, fixed rate, fully
amortizing mortgage loan with an original term to maturity of ___ years. The
Seller also offers fixed-rate fully-amortizing mortgage loans with original
terms to maturity of ___________ and __ years and fixed rate mortgage loans
with original terms to maturity of __ or __ years and an amortization
schedule of up to __ years or an original term to maturity of up to __ years
and an amortization schedule of up to __ years. The Seller also offers
closed end, adjustable rate, fully-amortizing mortgage loans with original
terms to maturity of either __ or __ years. Each adjustable rate mortgage
loan provides for annual adjustments based on changes in the level of the
Index, subject to rounding, the Periodic Cap and the applicable Lifetime Cap
and the applicable Lifetime Floor.
In most instances, the Seller's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to four-
family residential and mixed-use properties, including townhouses and
individual units in condominiums and planned unit developments. In the
fiscal year ended ____________ and the three months ended _____________,
approximately ____% and _____%, respectively, of the mortgage loans
originated by the Seller were secured by owner occupied residences. The
Seller also makes mortgage loans secured by first or second liens on
residential rental properties or vacation properties.
(ALL OF THE SELLER'S FIXED RATE MORTGAGE LOANS ARE SIMPLE INTEREST
LOANS.) A Simple Interest Loan provides for a series of substantially equal
monthly payments which, if paid when due, will fully amortize the amount
financed by the scheduled maturity date. Each monthly payment includes an
installment of interest which is calculated on the basis of the outstanding
principal balance of the mortgage loan multiplied by the stated Loan Rate and
further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made
and the denominator of which is the number of days in the annual period for
which interest accrues on such loan. As payments are received under a Simple
Interest Loan, the amount received is applied first to interest accrued to
the date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a
Simple Interest Loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if a borrower
pays the fixed monthly installment after the scheduled due date, the portion
of the payment allocable to interest will be greater, and the amortization of
the unpaid principal balance will be correspondingly less.
All of the Seller's mortgage loans may be prepaid by the borrowers in
whole or in part at any time without penalty. Late charges are assessed on
loans for which payments are made after applicable grace periods established
by federal and state laws. None of the Seller's mortgage loans are insured
or guaranteed by any governmental agency or instrumentality, and none are
covered by primary mortgage guaranty insurance policies.
UNDERWRITING PROCEDURES
The following is a description of the underwriting procedures
customarily employed by the Seller with respect to fixed rate and adjustable
rate mortgage loans, home improvement installment sales contracts and
installment loan agreements secured by first or second liens on one- to four-
family residential properties, including townhouses and individual units in
condominiums and planned unit developments. The Seller's underwriting
process, which is centralized at its corporate headquarters, is intended to
assess the applicant's credit standing and repayment ability and the value
and adequacy of the real property security as collateral for the proposed
loan. The Seller considers itself to be a credit lender as opposed to an
equity lender, focusing primarily on the borrower's ability and willingness
to repay, and only secondarily on the potential value of the collateral upon
foreclosure, in determining whether or not to make a mortgage or home
improvement loan. As of ___________, the Seller employed ____ loan officers
and ___ underwriters. Underwriters are primarily promoted from within the
Seller on a selective basis in order to maintain the quality and integrity of
the Seller's business philosophy. All underwriters receive fixed annual
salaries which are not based on underwriting volume.
The application process generally is conducted by telephone. Each
applicant for a mortgage or home improvement loan is required to supply the
information necessary to complete an application which lists the applicant's
liabilities, income, credit and employment history and other demographic and
personal information. If the information in the loan application
demonstrates that the applicant has sufficient income and that there is
sufficient equity in the real property to justify making a mortgage loan, the
loan officer will conduct a further credit investigation of the applicant.
This investigation includes obtaining and reviewing an independent credit
bureau report on the credit history of the applicant in order to evaluate the
applicant's ability to repay. The credit report typically contains
information relating to such matters as credit history with local 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 loan officer.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An
underwriter will then evaluate the submission in accordance with certain
established guidelines. The underwriter will either approve, reject, or
amend the loan request based on the information submitted in the application.
If the applicant accepts the amendment, the underwriter will approve the
amended loan application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current
W-2 forms supplied by the applicant. Income tax returns also may be obtained
and reviewed. Self-employed borrowers generally are required to have been in
business for at least two years and must provide signed federal income tax
returns, including all schedules thereto, for the past two tax years, and may
be required to furnish personal and business financial statements if deemed
necessary by the underwriter.
In certain circumstances, the Seller may not be able to verify the
income claimed on the application but is able to document adequate cashflow
to support the loan for which the application was made. In such
circumstances, the permitted combined loan-to-value ratio will be less than
otherwise would be the case. Approximately ____% (by Principal Balance as of
the Statistical Calculation Date) of the Initial Home Equity Loans in Loan
Group One and approximately __% (by Principal Balance as of the Statistical
Calculation Date) of the Initial Home Improvement Contracts in Loan Group Two
were underwritten using such alternative approach to income verification.
If there is a senior mortgage on the property to be used as security for
the mortgage or home improvement loan, the loan officer also evaluates the
type and outstanding balance of the senior mortgage loan and its payment
history. The Seller obtains a credit reference on the senior mortgage by
using either credit bureau information, telephone verification, the year-end
senior mortgage statement, canceled checks or written verification from the
senior mortgagee.
In every instance, the property securing a loan made by the Seller is
appraised and title insurance acquired before the loan is closed. The Seller
requires appraisals on all properties that will secure its mortgage and home
improvement loans. Such appraisals are conducted by approved, independent
third-party appraisers who are paid a fee by the applicant, regardless of
whether the application for a loan is approved. All appraisals are required
to be on forms approved by FNMA or FHLMC. The Seller obtains a lender's
title insurance policy or binder, or other assurance of title customary in
the relevant jurisdiction. Homeowners' insurance coverage is required on
every property securing a home equity loan or home improvement loan
originated by the Seller. Necessary coverage and mortgagee clause
endorsements are acquired and monitored by the loan servicing department.
Forced-placed policies are acquired for properties in which the borrower has
allowed coverage to lapse.
After obtaining all applicable employment, credit and property
information, the Seller determines whether sufficient unencumbered equity in
the property exists and whether the prospective borrower has sufficient
monthly income available to support the payments of principal and interest on
the mortgage loan and/or home improvement loan in addition to any senior
mortgage loan payments (including any escrows for property taxes and hazard
insurance premiums) and other monthly credit obligations. The Seller applies
the "debt-to-gross income ratio" which is the ratio of the borrower's total
monthly payments on all outstanding debt (including the new loan) to the
borrower's gross verifiable monthly income. The debt-to-gross income ratio
generally may not exceed __%. For ARMs, such ratios generally are calculated
using the "fully indexed" rate (i.e., the sum of the applicable Index and the
related Gross Margin). In addition, the maximum Combined Loan-to-Value Ratio
of any mortgage loan may not exceed __% and may be reduced depending on a
number of factors, including the applicant's credit history and employment
status.
Any exceptions to the underwriting policies may be approved by the
manager of the underwriting department. The factors considered when
determining if an exception to the general underwriting standards should be
made include: the quality of the property, how long the borrower has owned
the property, the amount of disposable income, the type and length of
employment, the credit history, the current and pending debt obligations, the
payment habits and the status of past and currently existing mortgages.
When an application is approved, a mortgage and/or home improvement loan
is completed by signing the applicable loan documents, including a promissory
note and mortgage. All loans are closed by approved attorneys. Following
the three business day rescission period required by the federal Truth-in-
Lending Act, a loan is fully funded. Scheduled repayment of principal and
interest on such loan generally begins one month from the date interest
starts to accrue. After a mortgage or home improvement loan is underwritten,
approved and funded, the loan package is reviewed by an employee.
REFINANCING POLICY
Where the Seller believes that borrowers having existing loans with the
Seller are likely to refinance such loans due to interest rate changes or
other reasons, the Seller actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with the Seller. Such
refinancings generate fee and servicing income for the Seller. Since the
solicited borrowers may refinance their existing loans in any case, the
Seller believes that this practice will be unlikely to affect the prepayment
experience of the mortgage loans in a material respect. The Seller also has
solicited its borrowers who are in good standing to apply for additional
loans, consistent with its origination standards where deemed appropriate.
SERVICING OF HOME EQUITY AND HOME IMPROVEMENT LOANS
The Servicer has established standard policies for the servicing and
collection of the mortgage and home improvement loans. Servicing includes,
but is not limited to, post-origination loan processing, customer service,
collections, remittance processing and liquidations.
The Servicer sends a monthly statement to each of its borrowers.
Collection procedures vary somewhat depending on whether a late payment is
the first payment due under the loan. If the first payment is not received
on or prior to the due date, an initial phone call is made on the first
business day after the due date. Phone calls continue on a daily basis until
contact is made. A "Friendly Reminder Letter" is sent on the second business
day after the due date. If no contact is made with the borrower by the _____
day after the due date, a "Pre-foreclosure Letter" is sent, and a qualified
outside agency is used to inspect the property. On the _____ day after a
first payment default a Notice of Default is sent to the borrower. This
letter indicates an intent to accelerate the loan if satisfactory
arrangements are not made within ten days.
If the delinquency relates to a due date other than the
first due date, a Friendly Reminder Letter is sent on the second business day
after the due date. On the _____ day after the due date, telephone calls to
the borrower begin and telephone calls continue on a daily basis until
payment is received or contact is made. In addition, a series of mailings is
made depending on the customer's payment history. On the _____ day of
delinquency a Notice of Default is sent. A qualified outside agency is used
to conduct an interview with the borrower and the property is inspected.
Accounts which are __ days past due without a specific arrangement for
repayment will be sent a Notice of Intent to Foreclosure which gives the
customer _____ days in which to respond. On the _____ day of delinquency, a
determination whether to foreclose is made. If the Servicer decides to
foreclose, the necessary documentation is sent to an approved attorney who
then sends the borrower an acceleration letter allowing the borrower __ days
to reinstate the mortgage. When foreclosure proceedings are initiated, a
third party appraiser completes a drive-by evaluation of the property and
obtains comparable sales prices and listings in the area. In addition,
homeowner's insurance is verified and the status of senior mortgages and
property taxes is checked. Subject to applicable state law, all legal
expenses are assessed to the account and become the responsibility of the
borrower.
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 cured. If the
Servicer determines that purchasing a property securing a mortgage or home
improvement 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 over time in accordance
with, among other things, the Servicer's business judgment, changes in the
portfolio and applicable laws and regulations. Any realization from the sale
of foreclosed property is taken as recovery. After the Servicer acquires
title to a mortgaged property by foreclosure or deed in lieu of foreclosure,
an approved realtor is selected to list and advertise the property.
The Servicer may not foreclose on the property securing a junior
mortgage or home improvement loan unless it forecloses subject to all senior
mortgages. If any senior mortgage loan is in default after the Servicer has
initiated its foreclosure actions, the Servicer may advance funds to keep
such senior mortgage loan current until such time as the Servicer satisfies
such senior mortgage loan. Such amounts are added to the balance of the
mortgage or home improvement loan. In the event that foreclosure proceedings
have been instituted on any senior mortgage prior to the initiation of the
Servicer's foreclosure action, the Servicer will either satisfy the senior
mortgage loan at the time of the foreclosure sale or take other action to
protect its interest in the related property.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience for
each of the periods shown for the Servicer's portfolio of home equity and
home improvement lines of credit. The Servicer believes that there have been
no material trends or anomalies in the historical delinquency and loss
experience as represented in the following tables. The information in the
tables below has not been adjusted to eliminate the effect of the growth in
the size of the Servicer's portfolio during the periods shown. Accordingly,
loss and delinquency as percentages of aggregate principal balance of such
loans for each period may be higher than those shown if a group of such loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. The data presented in the following
tables are for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Loans will be similar to that set
forth below.
<TABLE>
<CAPTION>
DELINQUENCY
EXPERIENCE
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of As of December 31,
___________, 1996(1) 1995 1994 1993
Number of Number of Number of Number of
Loans Amount Loans Amount Loans Amount Loans Amount
Portfolio Principal
Outstanding at
Period End . . . . . $ $ $ $
Delinquency(1)
30-59 Days . . . . . $ $ $ $
60-89 Days . . . . .
90 or More Days(2) . _____ _____ _____ _____ _____ _____ _____ _____
Total Delinquencies . . $ $ $ $
Total Delinquencies
as a Percentage
of the Portfolio
at Period End . . . . % % % % % % % %
(table continued)
DELINQUENCY EXPERIENCE (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of As of December 31,
___________, 1996(1) 1995 1994 1993
Number of Number of Number of Number of
Loans Amount Loans Amount Loans Amount Loans Amount
Portfolio Principal
Outstanding at
Period End . . . . . $ $ $ $
Delinquency(1)
30-59 Days . . . . . $ $ $ $
60-89 Days . . . . .
90 or More Days(2) . _____ _____ _____ _____ _____ _____ _____ _____
Total Delinquencies . . $ $ $ $
Total Delinquencies
as a Percentage
of the Portfolio
at Period End . . . . %
% % % % % % %
</TABLE>
(1) The period of delinquency is based on the number of days payments
are contractually past due for all loans other than mortgage loans
previously charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
<TABLE>
<CAPTION>
LOSS EXPERIENCE (Dollars in Thousands)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
___________, 1996(1) 1995 1994 1993
Number of Number of Number of Number of
Loans Amount Loans Amount Loans Amount Loans Amount
Portfolio Principal
Outstanding at
Period End . . . . $ $ $ $
Gross Losses . . . . $ $ $ $
Recoveries. . . . . . $ $ $ $
Net Losses . . . . . $ $ $ $
Net Losses as a
Percentage of
Portfolio at
Period End . . . .
$ $ $ $
</TABLE>
(1) Net Losses equal total principal charged off less recoveries. The
customary policy of the Bank is to charge off mortgage and home
improvement loans in full that are 120 days past due unless
foreclosure proceedings are planned or there are indications that
the account will be brought current. An account that is not
charged off because there are indications that payment is imminent
generally will be charged off after an additional 60 to 90 days if
such payment is not forthcoming.
(2) This percentage represents the ___-month period ended ___________,
1995 annualized and is not necessarily indicative of the results
which may occur for the full year.
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 Loans and in the related Loan Group. The rate
of principal payments on the Loans will in turn be affected by the
amortization schedules of the Loans (including, in the case of ARMs, changes
thereto to accommodate changes in the Loan Rate) and by the rate of principal
prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by the Seller or purchases by the Servicer).
The Loans may be prepaid by the Mortgagors at any time without a prepayment
penalty.
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Servicer of a defaulted Mortgage Loan and any
optional purchase of the remaining Loans in connection with the termination
of the Trust, in each case as described herein) will result in distributions
on the related Class or Classes of Offered Certificates of principal amounts
which would otherwise be distributed over the remaining terms of the Loans.
In addition, any Pre-Funded Amount allocated to a Loan Group remaining at the
end of the Pre-Funding Period will be distributed as a prepayment of the
related Class or Classes of Offered Certificates. Since the rate of payment
of principal of the 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-conventional home equity loans and home
improvement 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 and home improvement 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. Non-
conventional home equity loans and home improvement loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances
are stressed to the point of default.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement loans such as the Home Equity Loans and the Home
Improvement Contracts, respectively, have been originated in significant
volume only during the past few years and the Seller is not aware of any
publicly available studies or statistics on the rate of prepayment of such
Loans. Generally, home equity loans and home improvement loans are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
The prepayment experience of the Trust with respect to the 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 and/or home
improvement contracts. All of the Home Equity Loans (AND HOME IMPROVEMENT
CONTRACTS) 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 Mortgage Loan. See
"CERTAIN LEGAL ASPECTS OF LOANS--Due-on-Sale Clauses in Loans" in the
Prospectus. No assurance can be given as to the level of prepayments that
will be experienced by the Trust and it can be expected that a portion of
borrowers will not prepay their Loans to any significant degree.
OVERCOLLATERALIZATION
The overcollateralization and cross collateralization 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
for a Loan Group is less than the related Required Overcollateralization
Amount, the Remaining Net Excess Spread for such Loan Group, the Available
Transfer Cashflow and the Net Excess Principal will be used to reduce the
Class Certificate Balance of the related Class or Classes of Offered
Certificates through the distribution of Additional Principal. Until such
time, if any, that the Overcollateralization Amount for a Loan Group equals
the related Required Overcollateralization Amount, there will be no Available
Transfer Cashflow or Net Excess Principal to accelerate the amortization of
the other Class or Classes of Offered Certificates. Loans with higher Loan
Rates contribute more interest to the Excess Spread than do Loans with
relatively lower Loan Rates. If 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 related Class or Classes
of Offered Certificates from the distribution of Additional Principal.
Because the Excess Spread for a Loan Group is available to cover an
Available Funds Shortfall with respect to both the related Loan Group and the
other Loan Group, there may be no Remaining Net Excess Spread with which to
make payments of Additional Principal. Similarly, any Excess Principal for a
Loan Group will be applied to cover an Available Funds Shortfall in the other
Loan Group prior to being applied to the payment of Additional Principal for
the Class or Classes of Offered Certificates related to such other Loan
Group. Thus, the amount and timing of any distributions in respect of
Additional Principal on a Class of Offered Certificates will depend, in part,
on the prepayment and loss experience of the Loans in the Loan Group related
to the other Class or Classes of Offered Certificates.
The application of Remaining Net Excess Spread, Available Transfer
Cashflow and Net Excess Principal to payments of Additional Principal is
intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the Loans in each Loan Group. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related Loan Group and the Net Excess Spread and Excess Principal for the
other Loan Group for the related Distribution Date, the amount in respect of
principal distributed to the related Class or Classes of Offered Certificates
will be reduced. A draw on the Policy in respect of principal will not be
made until the Loan Group Balance is less than the aggregate Class
Certificate Balance of the related Class or Classes of Offered Certificates,
i.e., the related Class or Classes of Offered Certificates are
undercollateralized.
If a Required Overcollateralization Amount is allowed to step down, the
amount of Remaining Net Excess Spread and Net Excess Principal available to
the other Loan Group may be increased, and the amount of principal
distributed to the Class or Classes of Offered Certificates for which the
step down occurred will be decreased.
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. Either
Overcollateralization Amount may or may not equal the related Required
Overcollateralization Amount on any Distribution Date. There can be no
assurance as to whether or when either Overcollateralization Amount may equal
the related Required Overcollateralization Amount.
ARMS
As is the case with fixed rate Home Equity Loans and Home Improvement
Contracts, the ARMs may be subject to a greater rate of principal prepayments
in a low interest rate environment. For example, if prevailing interest
rates were to fall, Mortgagors with ARMs may be inclined to refinance their
ARMs with a fixed rate loan to "lock in" a lower interest rate. The
existence of the Periodic Cap, Lifetime Cap and Lifetime Floor also may
affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on the ARMs may differ from
that on the fixed rate Loans because the amount of the monthly payments on
the ARMs is subject to adjustment on each Change Date. If such different
experience were to occur, the prepayment experience on the Class A-3
Certificates may differ from that on the Fixed Rate Certificates.
Certain of the ARMs were originated with initial Loan Rates that were
based on competitive conditions and did not equal the sum of the applicable
Index and the related Gross Margin. In addition, none of the ARMs has
reached its initial Change Date. As a result, the Loan Rates on such ARMs
are more likely to adjust on their first, and possibly subsequent Change
Dates, subject to the effects of the applicable Periodic Cap and Lifetime
Cap. Because the Certificate Rate for the Class A-3 Certificates is a
function of the weighted average Remittance Rate of the ARMs, limits on
changes in the Loan Rates of the ARMs may limit changes in the Certificate
Rate for the Class A-3 Certificates.
Disproportionate principal payments on ARMs having Loan Rates higher
than the current Certificate Rate will also affect the yield on the Class A-3
Certificates. The yield to maturity of the Class A-3 Certificates will be
lower than otherwise would be the case if disproportionate principal payments
(including prepayments) are made on ARMs having Loan Rates that exceed the
related Certificate Rate.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth in "SUMMARY OF TERMS--Final Scheduled Distribution
Date herein". The Final Scheduled Distribution Date for the Class A-1
Certificates was determined based on the Structuring Assumptions (defined
below) and the assumption that there are no prepayments. The Final Scheduled
Distribution Dates for the Class A-2 and Class A-3 Certificates were set to
equal the Distribution Date in the 25th month following the month of the
latest possible scheduled maturity date for any of the Loans in the related
Loan Group. 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 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 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 Loans.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and Home
Improvement Contracts and the following additional assumptions (collectively,
the "Structuring Assumptions"): (i) the Loans prepay at the specified
percentages of the Prepayment Ramp or CPR (each as defined below), (ii) no
defaults or delinquencies in the payment by Mortgagors of principal of and
interest on the 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 each Class of Offered Certificates in
each period at the applicable Certificate Rate or initial Certificate Rate
described herein, (v) distributions in respect of the Offered Certificates
are received in cash on the 25th day of each month commencing in ___________,
(vi) the Servicer does not exercise its option to purchase the Loans
described herein under "DESCRIPTION OF THE CERTIFICATES--Termination;
Retirement of Certificates" and "--Optional Purchase of Defaulted Loans"
herein, (vii) the Offered Certificates are purchased on ________,
(viii) scheduled payments on the Loans are received on the first day of each
month commencing in the calendar month following 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
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 (MORTGAGE LOAN) has been
calculated based on the assumed (MORTGAGE LOAN) characteristics set forth in
the following table such that each Mortgage Loan will amortize in amounts
sufficient to repay the balance of such Mortgage Loan by its indicated
remaining term to maturity, (xi) all of the indicated Subsequent Loans
purchased with funds from the Pre-Funding Account are purchased during
______, (xii) the Trust consists of __ Loans with the characteristics set
forth in the following table, (xiii) the level of the Index remains constant
at ______% and (xiv) (THE MORTGAGE RATE FOR EACH MORTGAGE LOAN IN LOAN GROUP
TWO) is adjusted on its next Change Date (and on subsequent Change Dates, if
necessary) to equal the sum of (a) the assumed level of the Index and (b) the
Gross Margin (such sum being subject to the Periodic Rate Cap). While it is
assumed that each of the Loans prepays at the specified percentages of the
Prepayment Ramp or CPR, as applicable, this is not likely to be the case.
Moreover, discrepancies will exist between the characteristics of the actual
Loans which will be delivered to the Trustee (including Subsequent Loans) and
characteristics of the Loans assumed in preparing the tables herein.
Prepayments of home equity loans, home improvement installment sales
contracts and installment loan agreements are commonly measured relative to a
prepayment standard or model. The model used with respect to the Fixed Rate
Certificates (the "Prepayment Ramp") assumes that the Home Equity Loans in
Loan Group One prepay at a rate of ___% CPR in the first month after
origination, and an additional ___% each month thereafter until the __ month.
Beginning in the __ month and each month thereafter, the Prepayment Ramp
assumes a prepayment rate of __% CPR. For the Class A-3 Certificates, it was
assumed that the Home Improvement Contracts in Loan Group Two prepay at a
rate of ___% 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 improvement
contracts for the life of such loans. Neither model purports to be either an
historical description of the prepayment experience of any pool of loans or a
prediction of the anticipated rate of prepayment of any home equity loans or
home improvement agreements, including the Home Equity Loans and the Home
Improvement Contracts to be included in the Loan Groups.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Original Term to
Principal Current Loan Maturity Remaining Term to Months to Next
Balance($) Rate (%) (months)(6) Maturity (months)(7) Gross Margin(%) Change Date(8)
Loan Group One . . . .
</TABLE>
DECREMENT TABLES
The following tables indicate, 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 Ramp or CPR and the corresponding
weighted average lives of such Classes. It is not likely that (i) all of the
Loans will have the characteristics assumed, (ii) the Loans will prepay at
the specified percentages of the Prepayment Ramp or CPR or at any other
constant percentage or (iii) the level of the Index will remain constant at
the level assumed or at any other level. Moreover, the diverse remaining
terms to maturity of the Loans could produce slower or faster principal
distributions than indicated in the tables at the specified percentages of
the Prepayment Ramp or CPR, even if the weighted average remaining term to
maturity of the Loans is consistent with the remaining terms to maturity of
the Loans specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING
<TABLE>
<CAPTION>
<S> <C> <C>
CLASS A-1 CLASS A-2
PERCENTAGE OF PREPAYMENT RAMP PERCENTAGE OF PREPAYMENT RAMP
DISTRIBUTION DATE
Initial Percent . . . . . . . . .
February 1998 . . . . . . . . . .
February 1999 . . . . . . . . . .
February 2000 . . . . . . . . . .
February 2001 . . . . . . . . . .
February 2002 . . . . . . . . . .
February 2003 . . . . . . . . . .
February 2004 . . . . . . . . . .
February 2005 . . . . . . . . . .
February 2006 . . . . . . . . . .
February 2007 . . . . . . . . . .
February 2008 . . . . . . . . . .
February 2009 . . . . . . . . . .
February 2010 . . . . . . . . . .
February 2011 . . . . . . . . . .
February 2012 . . . . . . . . . .
February 2013 . . . . . . . . . .
February 2014 . . . . . . . . . .
February 2015 . . . . . . . . . .
February 2016 . . . . . . . . . .
February 2017 . . . . . . . . . .
February 2018 . . . . . . . . . .
February 2019 . . . . . . . . . .
February 2020 . . . . . . . . . .
February 2021 . . . . . . . . . .
February 2022 . . . . . . . . . .
February 2023 . . . . . . . . . .
February 2024 . . . . . . . . . .
February 2025 . . . . . . . . . .
February 2026 . . . . . . . . . .
Weighted Average
Life (years) . . . . . . . . .
___________________________
(table continued)
CLASS A-1 CLASS A-2
PERCENTAGE OF PREPAYMENT RAMP PERCENTAGE OF PREPAYMENT RAMP
DISTRIBUTION DATE
Initial Percent . . . . . . . . .
February 1998 . . . . . . . . . .
February 1999 . . . . . . . . . .
February 2000 . . . . . . . . . .
February 2001 . . . . . . . . . .
February 2002 . . . . . . . . . .
February 2003 . . . . . . . . . .
February 2004 . . . . . . . . . .
February 2005 . . . . . . . . . .
February 2006 . . . . . . . . . .
February 2007 . . . . . . . . . .
February 2008 . . . . . . . . . .
February 2009 . . . . . . . . . .
February 2010 . . . . . . . . . .
February 2011 . . . . . . . . . .
February 2012 . . . . . . . . . .
February 2013 . . . . . . . . . .
February 2014 . . . . . . . . . .
February 2015 . . . . . . . . . .
February 2016 . . . . . . . . . .
February 2017 . . . . . . . . . .
February 2018 . . . . . . . . . .
February 2019 . . . . . . . . . .
February 2020 . . . . . . . . . .
February 2021 . . . . . . . . . .
February 2022 . . . . . . . . . .
February 2023 . . . . . . . . . .
February 2024 . . . . . . . . . .
February 2025 . . . . . . . . . .
February 2026 . . . . . . . . . .
Weighted Average
Life (years) . . . . . . . . .
___________________________
</TABLE>
Rounded to the nearest whole percentage. The weighted average life of an
Offered Certificate is determined by (a) multiplying the amount of the
reduction, 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 reductions in Class Certificate Balance of such
Certificate referred to in clause (a).
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING
<TABLE>
<CAPTION>
<S> <C>
CLASS A-3
PERCENTAGE OF CPR
DISTRIBUTION DATE
Initial Percent . . . . . . . . .
February 1998 . . . . . . . . . .
February 1999 . . . . . . . . . .
February 2000 . . . . . . . . . .
February 2001 . . . . . . . . . .
February 2002 . . . . . . . . . .
February 2003 . . . . . . . . . .
February 2004 . . . . . . . . . .
February 2005 . . . . . . . . . .
February 2006 . . . . . . . . . .
February 2007 . . . . . . . . . .
February 2008 . . . . . . . . . .
February 2009 . . . . . . . . . .
February 2010 . . . . . . . . . .
February 2011 . . . . . . . . . .
February 2012 . . . . . . . . . .
February 2013 . . . . . . . . . .
February 2014 . . . . . . . . . .
February 2015 . . . . . . . . . .
February 2016 . . . . . . . . . .
February 2017 . . . . . . . . . .
February 2018 . . . . . . . . . .
February 2019 . . . . . . . . . .
February 2020 . . . . . . . . . .
February 2021 . . . . . . . . . .
February 2022 . . . . . . . . . .
February 2023 . . . . . . . . . .
February 2024 . . . . . . . . . .
February 2025 . . . . . . . . . .
February 2026 . . . . . . . . . .
Weighted Average Life
(years) . . . . . . . . . . . .
___________________________
(table continued)
CLASS A-3
PERCENTAGE OF CPR
DISTRIBUTION DATE
Initial Percent . . . . . . . . .
February 1998 . . . . . . . . . .
February 1999 . . . . . . . . . .
February 2000 . . . . . . . . . .
February 2001 . . . . . . . . . .
February 2002 . . . . . . . . . .
February 2003 . . . . . . . . . .
February 2004 . . . . . . . . . .
February 2005 . . . . . . . . . .
February 2006 . . . . . . . . . .
February 2007 . . . . . . . . . .
February 2008 . . . . . . . . . .
February 2009 . . . . . . . . . .
February 2010 . . . . . . . . . .
February 2011 . . . . . . . . . .
February 2012 . . . . . . . . . .
February 2013 . . . . . . . . . .
February 2014 . . . . . . . . . .
February 2015 . . . . . . . . . .
February 2016 . . . . . . . . . .
February 2017 . . . . . . . . . .
February 2018 . . . . . . . . . .
February 2019 . . . . . . . . . .
February 2020 . . . . . . . . . .
February 2021 . . . . . . . . . .
February 2022 . . . . . . . . . .
February 2023 . . . . . . . . . .
February 2024 . . . . . . . . . .
February 2025 . . . . . . . . . .
February 2026 . . . . . . . . . .
Weighted Average Life
(years) . . . . . . . . . . . .
___________________________
</TABLE>
Rounded to the nearest whole percentage.
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, 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 reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
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 in Loan Group
One; (ii) payments on the Home Equity Loans received on and after the Cut-Off
Date; (iii) the Home Improvement Contracts in Loan Group Two; (iv) payments
on the Home Improvement Contracts received on or after the Cut-Off Date; (v)
Mortgaged Properties relating to the Home Equity Loans and Home Improvement
Contracts that are acquired by foreclosure or deed in lieu of foreclosure;
(vi) each Collection Account and Distribution Account; (vii) the Capitalized
Interest Account; (viii) the Pre-Funding Account; (ix) the Policy; (x)
certain hazard insurance policies maintained by the borrowers of the Loans,
or the Servicer in respect thereof; and (xi) 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 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
("Certificates 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.
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 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 Certificate Principal 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 Seller, 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 LOANS
The Loans will be acquired by 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 Mortgage 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
Mortgage Loan on or after the Cut-Off Date (exclusive of payments in respect
of accrued interest on the 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 Seller. Each Mortgage Loan transferred to the Trust will be identified
on a schedule (the "Mortgage Loan Schedule") delivered to the Trustee
pursuant to the Agreement. Such schedule will include information as to the
Principal Balance of each Mortgage Loan as of the Cut-Off Date, as well as
information with respect to the current Loan Rate.
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 and Home Improvement Contracts endorsed to the Trustee and the Related
Documents. In lieu of delivery of original mortgages, the Depositor may
deliver or cause to be delivered true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded.
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 Mortgage 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 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 Loans
and the Related Documents pursuant to the Agreement and if any Mortgage 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 and the Depositor by the Trustee, the Seller will be obligated to
either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; 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) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Mortgage Loan as
of the date of purchase, plus the greater of (i) all accrued and unpaid
interest thereon and (ii) 30 days' interest thereon, computed at the Loan
Rate, net of the Servicing Fee with respect to such Mortgage Loan if the
Seller or an affiliate is the Servicer, plus the amount of any unreimbursed
Servicing Advances made by the Servicer with respect to such Mortgage Loan.
The Purchase Price will be deposited in the applicable Collection Account on
or prior to the next succeeding Determination Date after such obligation
arises. The obligation of the Seller to repurchase or substitute for a
Defective Mortgage Loan is the sole remedy regarding any defects in the Loans
and Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the applicable 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 Mortgage
Loan over the Principal Balance of such Eligible Substitute Mortgage Loan,
(ii) 30 days' interest on such excess computed at the Loan Rate, net of the
Servicing Fee if the Seller or an affiliate is the Servicer, and (iii) the
amount of any unreimbursed Servicing Advances and Monthly Advances made by
the Servicer with respect to such Defective Mortgage Loan if the Servicer is
not an affiliate of 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 Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage 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 Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less
than, the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan
Rate not less than the Loan Rate of the Defective Mortgage Loan and not more
than 1% in excess of the Loan Rate of such Defective Mortgage Loan; (iii)
have a mortgage of the same or higher level of lien priority as the mortgage
relating to the Defective Mortgage Loan; (iv) have a remaining term to
maturity not more than six months earlier and not later than the remaining
term to maturity of the Defective Mortgage Loan; (v) comply with each
representation and warranty as to the Loans set forth in the Purchase
Agreement (deemed to be made as of the date of substitution); (vi) have a
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan.; (vii) bear a fixed or adjustable Loan Rate if the Deleted Mortgage
Loan was in Loan Group One or Loan Group Two, respectively; and (viii) if the
Mortgage Loan is an ARM, have a Gross Margin and Lifetime Cap no less than,
the same interval between the Change Dates as, and a Loan Rate based on the
same Index as, that of the Defective Mortgage Loan.
In the Purchase Agreement, the Seller will make certain representations
and warranties with respect to the Home Equity Loans and Home Improvement
Contracts including, among others: (i) The information with respect to each
Mortgage Loan set forth in the Mortgage 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 Mortgage 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 with respect to the related Mortgage
Loan, 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 herein contemplated, the Seller held good,
marketable and indefeasible title to, and was the sole owner and holder of,
each Mortgage 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 will hold good, marketable and indefeasible
title, to, and be the sole owner of, each Mortgage Loan subject to no Liens;
(iv) No Mortgage Loan was 30 or more days delinquent as of the Cut-Off Date,
as measured at the end of the month; and (v) Each Mortgage 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.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Certificateholders or
the Certificate Insurer in the related Mortgage 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 Mortgage Loan an Eligible
Substitute Mortgage Loan or (ii) purchase such Defective Mortgage Loan from
the Trust. The same procedure and limitations that are set forth above for
the substitution or purchase of Defective Loans (DEFINED?) as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Mortgage Loan as a result of a breach of a
representation or warranty that materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer. The
obligation of the Seller to repurchase or substitute for a Defective Mortgage
Loan is the sole remedy regarding any breach of a representation or warranty
with respect thereto available to the Trustee or the Certificateholders.
The Depositor will make no representations or warranties with respect to
the 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 Loan.
PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNTS AND DISTRIBUTION ACCOUNT
The Trustee will establish and maintain a separate account (each a
"Collection Account") for each Loan Group. Each Collection Account will be
an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, upon receipt by the Servicer of
amounts in respect of the 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 for the applicable Loan Group. 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 (each, a "Distribution
Account") for each Loan Group into which will be deposited amounts withdrawn
from the related Collection Account for distribution to Certificateholders on
a Distribution Date. Each 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 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 in
the highest short-term rating category by each Rating Agency and the long-
term debt obligations of which are rated at least Aa3 by Moody's, (ii) a
trust account or accounts maintained with the trust department of a federal
or a state chartered depository institution or trust company the long-term
debt obligations of which are rated at least Baa3 by Moody's, acting in a
fiduciary capacity 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.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
not to exceed approximately $_________ will be deposited in the Pre-Funding
Account. Of such amount, approximately $__________ will be used to purchase
Subsequent Home Equity Loans for deposit into Loan Group One and, if
required, to make accelerated payments of principal on the Fixed Rate
Certificates and approximately $__________ will be used to purchase
Subsequent Home Improvement Contracts for deposit into Loan Group Two and, if
required, to make accelerated payments of principal on the Class A-3
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 $_____, (b) an Event of Default under
the Agreement and (c) __________, amounts on deposit in the Pre-Funding
Account may be withdrawn from time to time to acquire Subsequent 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 as a prepayment of principal of
the Class A-1 and Class A-2 Certificates, on a pro rata basis, or the Class
A-3 Certificates, as applicable, based on the remaining Pre-Funded Amount
allocated to the related Loan Group. (ONLY FIXED-RATE SUBSEQUENT HOME EQUITY
LOANS MAY BE ADDED TO LOAN GROUP ONE, AND ONLY ADJUSTABLE-RATE SUBSEQUENT
HOME IMPROVEMENT CONTRACTS MAY BE ADDED TO LOAN GROUP TWO.)
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 and the premium due for the Policy 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
Not later than the close of business on the second Business Day prior to
the related Distribution Date, the Servicer will be required to remit to the
Trustee for deposit in the applicable Collection Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the
interest accrued on each Mortgage Loan through the related Due Date but not
received by the Servicer as of the close of business on the related
Determination Date (net of the Servicing Fee with respect to such Mortgage
Loan), plus, with respect to each REO Property which was acquired during or
prior to the related Due Period and as to which a final disposition thereof
did not occur in the related Due Period, an amount equal to the excess, if
any, of interest for the most recently ended Due Period on the Principal
Balance of the Mortgage Loan relating to such REO Property at the related
Loan Rate (net of the Servicing Fee with respect to such Mortgage Loan) over
the net income from the REO Property transferred to the related Collection
Account for such Distribution Date pursuant to the Agreement (the "Monthly
Advance"). The Servicer may fund all or a portion of any Monthly Advance
from funds on deposit in the applicable 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 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's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage 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 Mortgage Loan in
respect of which such unreimbursed amounts are owed. The Servicer's right to
such reimbursement 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 Mortgage Loan and to
Liquidation Proceeds and Insurance Proceeds on the related Mortgage 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 applicable Distribution Account.
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it determines would be nonrecoverable from amounts received in
respect of the related Mortgage Loan.
COMPENSATING INTEREST
The Agreement provides that not later than the close of business on the
second Business Day prior to the related Distribution Date, the Servicer will
remit to the Trustee for deposit to the applicable Collection Account an
amount equal to the lesser of (i) the aggregate of the Prepayment Interest
Shortfalls 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 deposited to either Collection Account.
SPREAD ACCOUNT
The Trustee will establish on the Closing Date the Spread Account into
which it will deposit upon receipt from the holder of the Class R Certificate
an amount specified by the Certificate Insurer (the "Initial Spread Account
Deposit"). Amounts on deposit in the Spread Account will be available for
withdrawal to fund any shortfall between the available funds for distribution
to Holders of a Class of Offered Certificates and the related Interest
Remittance Amount and Principal Remittance Amount. If the Initial Spread
Account Deposit is available to fund any such shortfall on each Distribution
Date, funds on deposit in the Spread Account equal to the amount of such
shortfall will be withdrawn by the Trustee and deposited into the applicable
Distribution Account for distribution to Holders of the affected Class or
Classes of Offered Certificates.
PRIORITY OF DISTRIBUTIONS
On or before each Distribution Date, the Trustee will determine the
Overcollateralization Amount for each Loan Group after giving effect to the
distribution of the Principal Remittance Amount to the related Class or
Classes of Offered Certificates on such Distribution Date and the amount of
the related Net Excess Spread. The "Amount Available" for a Loan Group on a
Distribution Date will equal the sum of (i) the Available Remittance Amount
for such Loan Group, (ii) if an Available Funds Shortfall exists in such Loan
Group, (a) first, the Net Excess Spread from the other Loan Group, to the
extent of such Available Funds Shortfall, (b) second, the Excess Principal
from the other Loan Group, to the extent of any remaining Available Funds
Shortfall, and (c) third, any amounts in respect of any remaining Available
Funds Shortfall withdrawn from the Spread Account and deposited in the
applicable Distribution Account, (iii) (a) first, the Available Transfer
Cashflow, to the extent necessary to reach the Required Overcollateralization
Amount for such Loan Group and (b) second, the Net Excess Principal, to the
extent necessary to reach the Required Overcollateralization Amount for such
Loan Group, and (iv) any Insured Payments with respect to the related Class
or Classes of Certificates. On each Distribution Date the Trustee will
withdraw from each Distribution Account the Amount Available, and make
distributions thereof in the following order of priority and to the extent of
such Amount Available:
(A) From the Distribution Account for Loan Group One:
(i) to the Certificate Insurer the monthly premium then due with
respect to Loan Group One;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group One;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group One;
(iv) concurrently, to the Class A-1, Class A-2 and Class I
Certificates, an amount allocable to interest equal to
the applicable Interest Remittance Amount;
(v) sequentially, to the Class A-1 and Class A-2 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 Class
A-1, Class A-2 or Class I Certificates, together with
interest thereon at the rate referred to in the Insurance
Agreement;
(vii) sequentially, to the Class A-1 and Class A-2
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 Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group One; and
(xi) to the Class R Certificates, the balance, if any.
(B) From the Distribution Account for Loan Group Two:
(i) to the Certificate Insurer the monthly premium then due with
respect to Loan Group Two;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group Two;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group Two;
(iv) to the Class A-3 Certificates, an amount allocable to
interest equal to the related Interest Remittance
Amount;
(v) to the Class A-3 Certificates, an amount allocable to
principal equal to the related Principal Remittance Amount;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class
A-3 Certificates, together with interest thereon at the
rate referred to in the Insurance Agreement;
(vii) to the Class A-3 Certificates, an amount allocable to
principal equal to the Additional Principal;
(viii) to the Certificate Insurer, all other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(ix) to the Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group Two; 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.
The "Additional Principal" for any Class or Classes of Offered
Certificates and any Distribution Date will equal the lesser of (i) the
amount required to be distributed as principal so that the
Overcollateralization Amount for the related Loan Group equals the related
Required Overcollateralization Amount and (ii) the sum of (x) the Remaining
Net Excess Spread for such Loan Group, (y) the Available Transfer Cashflow
and (z) the Net Excess Principal.
The "Adjusted Net Loan Rate" for any Mortgage Loan and any Distribution
Date will equal the related Loan Rate minus the Expense Fee Rate.
An "Available Funds Shortfall" means with respect to any Loan Group and
Distribution Date, the amount by which the Available Remittance Amount for
such Loan Group is less than the Required Payments for such Loan Group.
The "Available Remittance Amount" with respect to any Loan Group and
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 Loans in such Loan Group (exclusive of the Servicing Fee with
respect to each Mortgage 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 applicable Collection Account
pursuant to the Agreement as of the related Determination Date, including any
Monthly Advances, Compensating Interest and, through the end of the Pre-
Funding Period, amounts withdrawn from the Capitalized Interest Account with
respect to the related Class or Classes of Offered Certificates and any
remaining amount on deposit in the Pre-Funding Account at the end of the Pre-
Funding Period and allocable to the related Loan Group, in each case with
respect to such Distribution Date.
The "Available Transfer Cashflow" for any Loan Group and Distribution
Date will equal the Remaining Net Excess Spread for the other Loan Group
remaining after the payment, if any, of Additional Principal on the Class or
Classes of Offered Certificates related to such other Loan Group.
The "Basic Principal Amount" with respect to any Loan Group and
Distribution Date will equal the sum of (i) each payment of principal on a
Mortgage 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 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 Mortgage 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 Mortgage Loan purchased by the Seller or
the Servicer as required or permitted by the Agreement as of the related
Determination Date and (b) with respect to any Defective Mortgage Loan for
which the Seller substitutes an Eligible Substitute Mortgage Loan as of the
related Determination Date, any excess of the Principal Balance of such
Defective Mortgage Loan over the Principal Balance of such Eligible
Substitute Mortgage Loan, plus the amount of any unreimbursed Servicing
Advances (defined herein) made by the Servicer with respect to the Mortgage
Loan 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 Principal" for any Loan Group and Distribution Date will
equal the lesser of (i) the portion, if any, of the Basic Principal Amount
for such Loan Group that is not required to be included in the Principal
Remittance Amount for the related Class or Classes of Offered Certificates
for such Distribution Date and (ii) the amount of such portion remaining
after the application of the related Available Remittance Amount to the
Required Payments for such Loan Group.
The "Excess Spread" for any Loan Group and Distribution Date will equal
interest collected or advanced on the Loans in such Loan Group (including
amounts allocated to the related Class of Offered Certificates in the
Capitalized Interest Account) minus the sum of (i) the Interest Remittance
Amount for the related Class or Classes of Offered Certificates and, (IN THE
CASE OF LOAN GROUP ONE, THE INTEREST REMITTANCE AMOUNT FOR THE CLASS I
CERTIFICATES) and (ii) the Expense Fees for such Loan Group.
The "Expense Fee Rate" will equal the sum of the per annum rates at
which the Servicing Fee, the Back-up Servicing Fee, the Trustee Fee and the
Premium are calculated which, will be ____%.
The "Interest Remittance Amount" for any Distribution Date will equal
interest accrued during the related Interest Period (a) in the case of a
Class of Offered Certificates, at the applicable Certificate Rate on the
Class Certificate Balance of such Class of Offered Certificates immediately
prior to the related Distribution Date, and (b) in the case of the Class I
Certificates, at the rate of _____% per annum on the Notional Balance
thereof which, (FOR ANY DISTRIBUTION DATE, WILL EQUAL THE LOAN GROUP BALANCE
OF LOAN GROUP ONE AS OF THE FIRST DAY OF THE RELATED DUE PERIOD.)
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 for the
related Loan Group and (y) the portion of such Basic
Principal Amount required to be distributed to increase
the Overcollateralization Amount for the related Loan
Group to the Required Overcollateralization Amount for
such Loan Group on 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 related Distribution
Account from the Pre-Funding Account pursuant to the
Agreement and allocable to the related Loan Group.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage 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 Principal" for any Loan Group and Distribution Date will
equal the Excess Principal for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Net Excess Spread" for any Loan Group and Distribution Date will
equal the Excess Spread for such Loan Group remaining after the application
thereof to cover an Available Funds Shortfall with respect to such Loan
Group.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal to
the Liquidation Proceeds, reduced by related expenses, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest
thereon. "Liquidation Proceeds" are the proceeds received in connection with
the liquidation of any Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise.
The "Overcollateralization Amount" for any Loan Group and Distribution
Date will equal the sum of (a) the excess, if any, of (i) the sum of the Loan
Group Balance and the amount on deposit in the Pre-Funding Account allocated
to such Loan Group (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 Class Certificate Balance of the related Class or Classes of Offered
Certificates, after giving effect to the distributions of the related
Principal Remittance Amount on such Distribution Date, and (b) the amount, if
any on deposit in the Spread Account allocated to the related Class or
Classes of Offered Certificates.
The "Remaining Net Excess Spread" for any Loan Group and Distribution
Date will equal the Net Excess Spread for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Required Payments" for any Loan Group and Distribution Date will
equal the amount required to pay the Expense Fees, other than the Servicing
Fee, the related Interest Remittance Amount(s) and the related Principal
Remittance Amount and to reimburse the Certificate Insurer for previously
unreimbursed Insured Payments with respect to the related Class or Classes of
Certificates, together with interest thereon at the rate referred to in the
Insurance Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder 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 and Certificate Rate;
(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 Class Certificate Balance, after giving effect to
such distribution;
(viii) the related Loan Group Balance;
(ix) the number and aggregate Principal Balances of the Loans in
the related Loan Group 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;
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of
foreclosure; and
(xi) the amount of any Insured Payments for such Distribution Date;
and
(xii) the amount of the Unrecovered Class A Portions for each
Loan Group realized
during the related Due Period; the cumulative amount of losses
realized since the Cut-Off Date for each Loan Group with
separate items indicating gross losses, principal losses,
recoveries, net losses and a breakout for 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 60 days 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 LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the 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 and home improvement loans in its servicing portfolio
comparable to the Home Equity Loans and Home Improvement Contracts.
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 Loans.
With respect to the 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 mortgage loans and home improvement loans it owns
or services. With respect to Loans that are junior in priority to a First
Lien on a Mortgaged Property, the Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such First Lien.
HAZARD INSURANCE
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 Mortgage Loan and any related First
Lien, (ii) the full insurable value of the premises securing the Mortgage
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 mortgage 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 Mortgage 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 mortgage 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 applicable 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 obtains and maintains a blanket policy as
provided in the Agreement insuring against fire and hazards of extended
coverage on all of the 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 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 LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements 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 Mortgage 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 Mortgage 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 Mortgage
Loan. Any fee collected in connection with an assumption will be retained by
the Servicer as additional servicing compensation. The terms of a Mortgage
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 Loans a portion of such interest
payments as a monthly Servicing Fee in the amount equal to ____% per annum
(the "Servicing Fee Rate") on the Principal Balance of each Mortgage Loan as
of the first day of each such Due Period. All 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 January 31 in each
year, beginning in January ____, 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 January 31 in each year, beginning in January ____, 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 or the Seller) 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 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
permissible under applicable law or are 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; 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. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Trustee and the
Certificateholders 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 Agreement provides that none of the Depositor, the Seller or the
Servicer or any of their respective directors, officers, employees or agents
will be under any other liability to the Trust, the Trustee, the Certificate-
holders or any other person for any action taken or for refraining from
taking any action pursuant to the Agreement. However, the Servicer will not
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 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.
THE BACK-UP SERVICER
____________ will be appointed as the Back-Up Servicer under the
Agreement. Prior to the occurrence of an Event of Servicer Termination, the
Agreement requires the Back-Up Servicer to maintain current records of each
Mortgagor's account and the activity therein. The Servicer will be required
to furnish electronically such records to the Back-Up Servicer on a monthly
basis, and the Back-Up Servicer will be required to recalculate the
Servicer's application of all funds received from or on behalf of the
Mortgagors. Upon the occurrence of an Event of Servicer Termination, the
Back-Up Servicer will be obligated to assume the obligations of the Servicer
as described below. In performing its obligations under the Agreement, the
Back-Up Servicer will be entitled to the same protections afforded to the
Servicer under the Agreement.
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 either
Collection Account any deposit required to be made under the Agreement, which
failure continues unremedied for three 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 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, 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 an affiliate of the Servicer, any failure of the
Seller to repurchase or substitute Eligible Substitute Loans for Defective
Loans (DEFINED?) 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 one Business Day; or (vii) any insufficiency in
either Amount Available excluding Insured Payments occurs on a Distribution
Date resulting in the need for an Insured Payment.
A "Trigger Event" will consist of: (i) the failure by the Seller or the
Servicer to pay any amount due the Certificate Insurer pursuant to the
Insurance Agreement among the Depositor, the Seller, the Servicer and the
Certificate Insurer, which continues unremedied for three Business Days after
written notice of such failure by the Certificate Insurer; (ii) the
Certificate Insurer determines that the performance of the Servicer is not
satisfactory; or (iii) the Servicer is a party to a merger, consolidation or
other corporate transaction in which the Servicer is not the surviving
entity, the debt of such surviving entity is not investment grade or the
Certificate Insurer determines that the servicing capabilities of the
surviving entity could materially and adversely affect the servicing of the
Loans.
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, 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 Loans, whereupon the Back-Up
Servicer will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement (the "Successor Servicer") and will be
entitled to similar compensation arrangements. Upon the occurrence and
continuation beyond the applicable grace period of the event described in
clause (vi) in the second preceding paragraph, the Back-Up Servicer will
immediately assume the duties of the Servicer. The Back-Up Servicer, as
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 Back-Up Servicer 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 $_________ and acceptable to the
Certificate Insurer to act as Successor Servicer under the Agreement.
Pending such appointment, the Back-Up Servicer 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
trustee in bankruptcy for the Servicer may be empowered to prevent the
termination and replacement of the Servicer if the only Event of Default 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, 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 Seller, 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. 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 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 or
(ii) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the holders of all Certificates then
outstanding. 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 a
Certificate Insurer Default has not occurred.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) termination of the Policy and payment in full of all amounts owing to the
Certificate Insurer and (B) the earliest of (i) the Distribution Date on
which the Class Certificate Balance of each Class of Offered Certificates has
been reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust, and (iii) the optional transfer to the Servicer
of the Loans, as described below.
The Servicer will have the right to purchase all remaining Loans, and
related REO Properties in the Trust and thereby effect early retirement of
the Certificates, subject to the Pool Balance of such Loans and REO
Properties at the time of purchase being less than or equal to __% of the sum
of the Pool Balance as of the Cut-Off Date and the Principal Balance of each
Subsequent Mortgage Loan as of the applicable Subsequent Cut-Off Date. In
the event the Servicer exercises such option, the purchase price will be at
least equal to (x) 100% of its then outstanding principal balance plus (y)
the greater of (i) the aggregate amount of accrued and unpaid interest on the
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 LOANS
The Servicer has the option to purchase from the Trust any Loan __ days
or more delinquent at a purchase price equal to the outstanding Principal
Balance of such Loan 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, plus all
unreimbursed amounts owing to the Certificate Insurer with interest thereon
at the rate referred to in the Insurance Agreement.
THE TRUSTEE
________________, a ____________ organized under the laws of the
___________, has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller 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 and the Servicer. The Depositor 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 and the Servicer. 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 written notice of default and unless
Certificateholders evidencing Percentage Interests of at least 51% of the
applicable Class have made written requests 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. 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 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 POLICY
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Policy pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date to the Trustee for
the benefit of the Holders of each Class of Offered Certificates of a maximum
amount equal to the applicable Guaranteed Interest Payment Amount and the
applicable Guaranteed Principal Payment Amount for such Distribution Date.
The Offered Certificates and the Agreement may not be amended unless the
Certificate Insurer has given its prior written consent. The amount of the
actual payment (the "Insured Payment"), if any, made by the Certificate
Insurer under the Policy on each Distribution Date allocated to such Class of
Offered Certificates or the Class I Certificates, as the case may be, is
equal to the sum of (A) the excess, if any, of (1) the Interest Remittance
Amount with respect to such Class and Distribution Date over (2) the Amount
Available (net of Insured Payments) for the related Loan Group and (B) the
amount by which the Class Certificate Balance of such Class of Offered
Certificates (or in the case of the Fixed Rate Certificates, the aggregate
Class Certificate Balance of such Certificates) after giving effect to all
allocations and distributions to principal on such Class or Classes of
Offered Certificates on such Distribution Date exceeds the related Loan Group
Balance as of such Distribution Date. The Certificate Insurer's obligations
under the Policy to make Insured Payments will be discharged to the extent
funds are transferred to the Trustee as provided in the Policy, whether or
not such funds are properly applied by the Trustee.
Payment of claims under the Policy will be made by the Certificate
Insurer following Receipt by the Certificate Insurer of the appropriate
notice for payment on the later to occur of (a) 11:00 a.m., New York City
time, on the second Business Day following Receipt of such notice for
payment, and (b) 11:00 a.m., New York City time, on the Business Day
immediately preceding the relevant Distribution Date.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer, prior to 2:00 pm., New York City
time, on a Business Day; delivery either on a day that is not a Business Day
or after 2:00 pm., New York City time, shall be deemed to be Receipt on the
next succeeding Business Day.
If the payment of the Guaranteed Interest Payment Amount or the
Guaranteed Principal Payment Amount is voided pursuant to a final and non-
appealable order (a "Preference Event") under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as
a result of such a Preference Event, the Trustee is required to return such
voided payment, or any portion of such voided payment, made in respect of the
Certificates (an "Avoided Payment"), the Certificate Insurer will pay an
amount equal to such Avoided Payment, upon receipt by the Certificate Insurer
from the Trustee of (x) a certified copy of a final order of a court
exercising jurisdiction in such Insolvency Proceeding to the effect that the
Trustee is required to return any such payment or portion thereof during the
term of the Policy because such payment was voided under applicable law, with
respect to which order the appeal period has expired without an appeal having
been filed (the "Final Order"), (y) an assignment, in form reasonably
satisfactory to the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Trustee relating to or
arising under such Avoided Payment and (z) a notice for payment appropriately
completed and executed by the Trustee. Such payment shall be disbursed to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Final Order and not to the Trustee directly.
Notwithstanding the foregoing, in no event shall the Certificate Insurer
be obligated to make any payment in respect of any Avoided Payment, which
payment represents a payment of the principal amount of a Class of Offered
Certificates, prior to the time the Certificate Insurer would have been
required to make a payment in respect of such principal in the absence of
such Preference Event.
The Certificate Insurer shall make payments due in respect of Avoided
Payments prior to 1:00 p.m., New York City time, on the second Business Day
following the Certificate Insurer's receipt of the documents required under
clauses (x) through (z) of the second preceding paragraph. Any such
documents received by the Certificate Insurer after 3:00 p.m., New York City
time, on any Business Day or on any day that is not a Business Day shall be
deemed to have been received by the Certificate Insurer prior to 3:00 p.m. on
the next succeeding Business Day.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New
York, New York, or the State of New Jersey are authorized or obligated by law
or executive order to be closed.
"Insolvency Proceeding" means the commencement, after the Closing Date,
of any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings by or against
any Person, or the commencement, after the Closing Date, of any proceedings
by or against any Person for the winding up or liquidation of its affairs, or
the consent after the date hereof to the appointment of a trustee,
conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, reorganization, marshalling of assets and liabilities
or similar proceedings of or relating to any Person.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Depositor, the Seller or Servicer. The Policy by its terms may not be
canceled or revoked. The Policy is governed by the laws of the State of New
York.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
Default exists, the Certificate Insurer will be entitled to exercise all
rights of the Holders of the Offered Certificates, without the consent of
such Certificateholders, and the Holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Certificate
Insurer. In addition, the Certificate Insurer will, as a third party
beneficiary to the Agreement, have, among others, the following rights: (i)
the right to give notices of breach or to terminate the rights and
obligations of the Servicer under the Agreement in the event of an Event of
Default by the Servicer and to institute proceedings against the Servicer;
(ii) the right to consent to or direct any waivers of defaults by the
Servicer; (iii) the right to remove the Trustee pursuant to the Agreement;
(iv) the right to direct the actions of the Trustee during the continuation
of a Servicer default; (v) the right to require the Seller to repurchase
Loans for breach of representation and warranty or defect in documentation;
(vi) the right to direct foreclosures upon the failure of the Servicer to do
so in accordance with the Agreement; and (vii) the right to direct the
Trustee to investigate certain matters. The Certificate Insurer's consent
will be required prior to, among other things, (i) the removal of the
Trustee, (ii) the appointment of any successor Trustee or Servicer or (iii)
any amendment to the Agreement (which consent will not be withheld if an
opinion of counsel is delivered and addressed to the Certificate Insurer and
the Trustee to the effect that failure to amend the Agreement would adversely
affect the interests of the Certificateholders).
THE CERTIFICATE INSURER
The information set forth in this section and in Appendix B and Appendix
C hereto has been supplied by ____________. Accordingly, none of the
Depositor, the Seller, the Servicer, the Trustee or the Underwriter makes any
representation as to the accuracy and completeness of such information.
________ is a ___________ which engages only in the business of
financial guarantee and surety insurance. _______ is licensed in 50 states
in addition to _________. ________ insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. ____________ also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
_________'s claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Corporation ("Standard
& Poor's"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps") and
"AAA" by Nippon Investors Service Inc. Such ratings reflect only the views
of the respective rating agencies, are not recommendations to buy, sell or
hold securities and are subject to revision or withdrawal at any time by such
rating agencies.
________ is regulated by ___________. In addition, _________ is subject
to regulation by the insurance laws and regulations of the other
jurisdictions in which it is licensed. Such insurance laws regulate, among
other things, the amount of net exposure per risk that ________ may retain,
capital transfers, dividends, investment of assets, changes in control,
transactions with affiliates and consolidations and acquisitions. __________
is subject to periodic regulatory examinations by the same regulatory
authorities.
________'s obligations under the Policy may be reinsured. Such
reinsurance does not relieve _________ of any of its obligations under the
Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, 1996 and 1995, _____________ had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $____ million and $____ million, respectively, and had not
incurred any debt obligations. ______________ requires ________ to establish
and maintain the contingency reserve, which is available to cover claims
under surety bonds issued by ____________.
The audited financial statements of ______________ prepared in
accordance with generally accepted accounting principles for the period ended
December 31, 1995 are attached as Appendix B to this Prospectus Supplement,
and the unaudited financial statements of _________ for the period ended
______________, are attached as Appendix C to this Prospectus Supplement.
Copies of _________'s financial statements prepared in accordance with
statutory accounting standards, which differ from generally accepted
accounting principles, and filed with _____________________ are available
upon request. __________ is located at ____________________ and its
telephone number is _______________.
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 Loans. The Loans
will have been acquired by the Depositor from _____________ in a privately
negotiated transaction.
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, each Class of Offered Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase 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
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 relative Certificate Principal Balance). The
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.
<TABLE>
<CAPTION>
<S> <C>
Selling Reallowance
Class Concession Discount
A-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . % %
A-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . % %
A-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . % %
</TABLE>
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
REPORT OF EXPERTS
The financial statements of __________________ included in this
Prospectus Supplement in Appendix B, as of December 31, 1996 and 1995 and for
each of the years in the two year period then ended, have been included in
reliance upon the report of ______________, independent certified public
accountants, appearing in Appendix B, upon the authority of such firm as
expert in accounting and auditing.
RATINGS
It is a condition to issuance that each Class of Offered Certificates be
rated not lower than ____________ by (_________________) and _____________ by
(__________________).
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Loans to which they are entitled. The rating takes
into consideration the characteristics of the 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 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.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon by Brown & Wood LLP, New York, New York.
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL LOANS IN THE LOAN GROUPS
AS OF THE CUT-OFF DATE
LOAN GROUP ONE
LOAN GROUP TWO
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________, 1998)
$_____________
BEAR STEARNS HOME EQUITY LOAN TRUST 199__-__
$__________ ASSET-BACKED NOTES, SERIES 199__-__
$__________ ASSET-BACKED CERTIFICATES, SERIES 199__-__
The Home Equity Loan Trust 199__-__ (the "Trust") will be formed
pursuant to a trust agreement to be dated as of ______, 199__ (the "Trust
Agreement") and entered into by Bear Stearns Asset Backed Securities, Inc.
(the "Depositor"), __________, as servicer (the "Servicer"), and ________, as
owner trustee (the "Owner Trustee"). The Trust will issue $_________
aggregate principal amount of Asset Backed Notes (the "Notes"). The Notes
will be issued pursuant to an indenture to be dated as of ______ 1, 199__
(the "Indenture"), between the Trust and _________, as indenture trustee (the
"Indenture Trustee"). The Trust will also issue $________ aggregate
principal amount of Asset Backed Certificates, Series 199__-__ (the
"Certificates" and, together with the Notes, the "Securities"). The Trust
will consist of certain (adjustable rate) (fixed rate) home equity revolving
credit line loans made or to be made in the future (the "Revolving Credit
Line Loans") secured (primarily) by (second) deeds of trust or Mortgages on
residential properties that are primarily one- to four-family properties,
the
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-13 AND IN THE PROSPECTUS ON PAGE 15 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE SECURITIES.
THE SECURITIES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEES OR ANY
OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SECURITIES
NOR THE UNDERLYING HOME EQUITY LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, 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 SECURITIES AND EXCHANGE 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 Security Pass-Through/Interest Price to Underwriting Proceeds to
Balance Rate Public(1) Discount Depositor(1)(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Note $ % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-1 Certificate . . . . . . $ % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate . . . . . . $ % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate . . . . . . $ (3) % %
- ----------------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . $ $ $ $
==================================================================================================================================
</TABLE>
_________________________
(1) Plus accrued interest, if any, from _________.
(2) Before deducting expenses, estimated to be $________.
(3) The Class A-3 Certificates will bear interest at a variable rate
that, for any Distribution Date, will equal the lesser of (i) ____%
per annum and (ii) the weighted average of the Loan Rates (as
defined herein) of the Loans. The Pass-Through Rate for the first
Distribution Date is expected to be approximately ____% per annum.
See "Description of the Securities" herein.
The Securities are offered by Bear, Stearns & Co. Inc. (and _________)
(the "Underwriters") when, as and if issued, delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the Securities will be made in book-entry form only, through the
Same Day Funds Settlement System of The Depository Trust Company, on or about
_________, 199__.
____________________
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
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.
____________________
Each Series of Securities offered hereby constitutes part of a separate
Series of Asset Backed Securities being offered by Bear, Stearns & Co. Inc.
from time to time pursuant to the Prospectus dated _________, 1998. This
Prospectus Supplement does not contain complete information about the
offering of the Securities. Additional information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Securities may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
____________________
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is _______, 199__
(cover page continued)
Collections in respect of such Revolving Credit Line Loans, and certain other
property relating to such Revolving Credit Line Loans. (In addition, the
Securities will have the benefit of an irrevocable and unconditional limited
financial guaranty insurance policy (the "Policy") issued by __________ (the
"Insurer") covering (describe).)
Distributions of principal of and interest on the Notes will be made on
the _____ day of each month or, if such date is not a Business Day, then on
the succeeding Business Day (each, a "Distribution Date"), commencing on
________, 199__, to the extent described herein. Interest will accrue on the
Notes at a rate (the "Note Rate") equal to ____% per annum from the Closing
Date to the first Distribution Date and at (a floating rate equal to LIBOR
plus ____% per annum) (____% per annum) thereafter. The Certificates will
represent fractional undivided interests in the Trust. Distributions of
principal of and interest on the Securities will be made on each Distribution
Date to the extent described herein. Interest will accrue on the
Certificates at a rate (the "Pass-Through Rate") equal to ____% per annum
from the Closing Date to the first Distribution Date and at (a floating rate
equal to LIBOR plus ____% per annum) (____% per annum) thereafter. Payments
of interest on and principal of the Notes will have equal priority (and will
be made pro rata) with payments of principal of and interest on the
Certificates.
There is currently no secondary market for the Securities. The
Underwriters intend to establish a market in the Securities but are not
obligated to do so. There can be no assurance that a secondary market for
any of the Securities will develop, or if one does develop, that it will
continue or offer sufficient liquidity of investment.
The yield to investors on each Class of Securities will be sensitive in
varying degrees to the rate and timing of principal payments (including
prepayments) on the Loans, which generally may be prepaid in full or in part
at any time without penalty. The yield to maturity of a Class of Securities
purchased at a discount or premium will be more sensitive to the rate and
timing of payments thereon. Holders of the Securities should consider, in
the case of any such Securities 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
Securities 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 Loans or as to the resulting yield to maturity of any
Class of Securities.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes.
As described more fully herein and in the Prospectus, the Certificates will
be designated as "regular interests" in a REMIC. See "Certain Federal Income
Tax Considerations" herein and 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 ANY
CLASS OF SECURITIES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE SECURITIES IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
____________________
The Securities offered by this Prospectus Supplement constitute a
separate series of Securities being offered by the Depositor pursuant to its
Prospectus dated ________, 1998, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus
contains important information regarding this offering that is not contained
herein, and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full.
SUMMARY
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. Certain
capitalized terms used herein are defined elsewhere in the Prospectus
Supplement or in the Prospectus.
Trust . . . . . . . . . . . . . . Bear Stearns Home Equity Loan Trust
199__-__ (the "Trust" or the "Issuer"), a
Delaware business trust established
pursuant to the Trust Agreement, dated as
of _______, 199__. The property of the
Trust will include: a pool of (adjustable)
(fixed) rate home equity loan revolving
credit line loans made or to be made in
the future (the "Revolving Credit Line
Loans") under certain home equity
revolving credit line loan agreements (the
"Revolving Credit Line Loan Agreements")
and secured (primarily) by (second) (deeds
of trust) (Mortgages) on residential
properties that are primarily one- to
four-family properties (the "Mortgaged
Properties"); the Collections in respect
of the Revolving Credit Line Loans
received on or after the Cut-off Date;
property that secured the Revolving Credit
Line Loans that has been acquired by
foreclosure or deed in lieu of
foreclosure; (a surety bond or letter of
credit); an assignment of the Depositor's
rights under the Purchase Agreement;
rights under certain hazard insurance
policies covering the Mortgaged
Properties; and certain other property, as
described more fully herein.
The Trust will include the Principal
Balance of each Revolving Credit Line Loan
as of the Cut-off Date (the "Cut-off Date
Principal Balance") plus any additions
thereto as a result of new advances made
pursuant to the applicable Revolving
Credit Line Loan Agreement (the
"Additional Balances") during the life of
the Trust. With respect to any date, the
"Pool Balance" will be equal to the
aggregate of the Principal Balances of all
Revolving Credit Line Loans as of such
date. The "Principal Balance" of a Loan
(other than a Liquidated Loan) on any day
is equal to its Cut-off Date Principal
Balance, plus (i) any Additional Balances
in respect of such Revolving Credit Line
Loan, minus (ii) all Collections credited
against the Principal Balance of such
Revolving Credit Line Loan in accordance
with the related Revolving Credit Line
Loan Agreement prior to such day. The
Principal Balance of a Liquidated Loan
after the final recovery of related
Liquidation Proceeds shall be zero.
Securities Offered . . . . . . . The Securities offered hereby are (i)
Asset Backed Notes (the "Notes") and (ii)
Asset Backed Certificates (the
"Certificates" and, together with the
Notes, the "Securities"). Each Security
represents the right to receive payments
of interest at the rate described below,
payable monthly, and payments of principal
at such time and to the extent provided
below.
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., the
Depositor, the Servicer, the Trustees, the
Seller or any affiliate of the foregoing
has guaranteed or is otherwise obligated
with respect to the Securities of any
Series. See "The Depositor" in the
Prospectus.
Servicer . . . . . . . . . . . . __________ (the "Servicer"). The Servicer
will service the Revolving Credit Line
Loans pursuant to a Servicing Agreement
dated _________ 1, 199__ between the
Issuer and the Servicer.
Indenture . . . . . . . . . . . . The Notes will be issued pursuant to an
indenture dated as of _________, 199__
(the "Indenture") between the Trust and
_______________, in its capacity as
indenture trustee (the "Indenture
Trustee"). The Indenture Trustee will
allocate distributions of principal and
interest to Holders of the Notes (the
"Noteholders") in accordance with the
Indenture.
Trust Agreement . . . . . . . . . Pursuant to a trust agreement dated as of
________, 199__ (the "Trust Agreement"),
among the Depositor, the Servicer and
___________, in its capacity as owner
trustee (the "Owner Trustee"), the Trust
will issue the Certificates in an initial
aggregate amount of $__________. The
Certificates will represent fractional
undivided interests in the Trust.
The Revolving Credit Line Loans . The Revolving Credit Line Loans are
(primarily) secured by (second) deeds of
trust or Mortgages on Mortgaged
Properties. The Revolving Credit Line
Loans were originated by ______ and on or
prior to the Closing Date, _______ will
sell the Revolving Credit Line Loans to
the Depositor pursuant to a purchase
agreement (the "Purchase Agreement"). The
aggregate Cut-off Date Principal Balance
of the Revolving Credit Line Loans is
$___________ (the "Cut-off Date Pool
Balance").
The combined loan-to-value ratio of each
Revolving Credit Line Loan, computed using
the maximum amount the borrower was
permitted to draw down under the related
Revolving Credit Line Loan Agreement (the
"Credit Limit") and taking into account
the amounts of any related senior mortgage
loans (the "Combined Loan-to-Value
Ratio"), did not exceed ___% as of the
Cut-off Date. The weighted average
Combined Loan-to-Value Ratio of the
Revolving Credit Line Loans was ____% as
of the Cut-off Date. See "The Home Equity
Lending Program--Underwriting Procedures
Relating to the Revolving Credit Line
Loans" herein.
Interest on each Revolving Credit Line
Loan is payable monthly and computed on
the related average daily Principal
Balance for each billing cycle at a
variable rate per annum (the "Loan Rate")
equal at any time (subject to minimum and
maximum rates, as described herein under
"The Home Equity Lending Program--
Revolving Credit Line Loan Terms," and
further subject to applicable usury
limitations) to the sum of (i) (the prime
rate published in the "Money Rates"
section of The Wall Street Journal
generally on the Monday of the week in
which such Loan Rate adjusts (or, if no
rate is published on such day, then on the
next succeeding calendar day on which a
prime rate is published), rounded to the
nearest 1/8 of 1 percent) and (ii) a
margin generally within the range of ___%
to ___%. The Loan Rate is subject to
adjustment ________. With respect to each
Revolving Credit Line Loan, a "billing
cycle" is the calendar month preceding a
Due Date. Interest accrued at such rate
will be due on the Due Date in the month
following the close of the billing cycle.
(As to each Revolving Credit Line Loan,
the Due Date is the ____ day of the
month.) The Cut-off Date Principal
Balances of the Revolving Credit Line
Loans ranged from $______ to $_______ and
averaged $_______. Credit Limits under
the Revolving Credit Line Loans as of the
Cut-off Date ranged from approximately
$_____ to $______ and averaged $______.
Each Revolving Credit Line Loan was
originated in the period from _______ to
________, and, as of the Cut-off Date, the
weighted average Credit Limit Utilization
Rate (as defined herein) was approximately
___%. See "The Home Equity Lending
Program" and "Description of the Revolving
Credit Line Loans" herein.
Collections . . . . . . . . . . . All Collections on the Revolving Credit
Line Loans will be allocated by the
Servicer in accordance with the Revolving
Credit Line Loan Agreements between
amounts collected in respect of interest
("Interest Collections") and amounts
collected in respect of principal
("Principal Collections" and, together
with Interest Collections, "Collections").
The Servicer will generally deposit
Collections distributable to the Holders
in an account established for such purpose
under the Servicing Agreement (the
"Collection Account"). See "Description
of the Servicing Agreement--Allocations
and Collections" herein and "The
Agreements--Payments on Loans; Deposits to
Security Account" and "Servicing of Loans-
-Collection Procedures" in the Prospectus.
Description of the Securities . .
A. Distributions . . . . . On each Distribution Date, Collections on
the Revolving Credit Line Loans will be
applied in the following order of
priority:
(i) to the Servicer, the Servicing
Fee;
(ii) as payment for the accrued
interest due and any overdue
accrued interest (with interest
thereon to the extent lawful) on
the respective outstanding
principal balances of the Notes
(the "Note Balance") and the
Certificates (the "Certificate
Balance" and, together with the
Note Balance, the "Security
Balance");
(iii) as principal of the Securities,
the excess of Principal
Collections over Additional
Balances created during the
preceding Collection Period,
such amount to be allocated
between the Notes and
Certificates, pro rata, based on
their respective Security
Balances;
(iv) as principal of the Securities,
as payment for any Liquidation
Loss Amounts on the Revolving
Credit Line Loans;
(v) as payment for the premium on
the Policy;
(vi) to reimburse prior draws made on
the Policy; and
(vii) any remaining amounts, to the
Depositor.
As to any Distribution Date, the
"Collection Period" is the calendar month
preceding the month in which such
Distribution Date occurs.
"Liquidation Loss Amount" means, with
respect to any liquidated Revolving Credit
Line Loan, the unrecovered Principal
Balance thereof at the end of the related
Collection Period in which such Revolving
Credit Line Loan became a liquidated
Revolving Credit Line Loan, after giving
effect to the Liquidation Proceeds in
connection therewith.
B. Note Rate . . . . . . . Interest will accrue on the unpaid Note
Balance of the Notes (i) at a per annum
rate (the "Note Rate") equal to ___% from
the Closing Date to the first Distribution
Date and (ii) thereafter, from and
including the preceding Distribution Date
to but excluding such current Distribution
Date (each, an "Accrual Period") at (a
floating rate equal to LIBOR plus ___%)
(___%). (Interest will be calculated on
the basis of the actual number of days in
each Accrual Period divided by 360.) A
failure to pay interest on any Notes on
any Distribution Date that continues for
five days will constitute an Event of
Default under the Indenture.
C. Pass-Through Rate . . . Interest will accrue on the unpaid
Certificate Balance of the Certificates
(i) at a per annum rate (the "Pass-Through
Rate") equal to ___% from the Closing Date
to the first Distribution Date and (ii)
thereafter, at (a floating rate equal to
LIBOR plus ___%) (___%). (Interest will
be calculated on the basis of the actual
number of days in each Accrual Period
divided by 360.) A failure to pay
interest on any Certificates on any
Distribution Date that continues for five
days will constitute an Event of Default
under the Trust Agreement.
D. Distribution Date . . . The ____ day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing with _______,
199__. A "Business Day" is any day other
than a Saturday, Sunday or other day on
which banking institutions in New York,
New York (and ____________) are authorized
or obligated by law, regulation or
executive order to be closed.
E. Record Date . . . . . . The last day preceding a Distribution Date
or, if the Securities are no longer
Book-Entry Securities, the last day of the
month preceding the month in which a
Distribution Date occurs.
F. Final Scheduled
Distribution Dates . . To the extent not previously paid, (i) the
Certificate Balance of the Certificates
will be due on the ______ Distribution
Date and (ii) the Note Balance of the
Notes will be due on the _____
Distribution Date. Failure to pay the
full Note Balance of Notes or the full
Certificate Balance on the Certificates on
or before the related Final Scheduled
Distribution Date will constitute an Event
of Default under the Indenture or the
Trust Agreement, as the case may be.
G. Form and Registration . The Securities will initially be delivered
in Book-Entry form ("Book-Entry
Securities"). Holders of such Securities
may elect to hold their interests through
The Depository Trust Company ("DTC"), (in
the United States, or Cedel Bank, soci t
anonyme, ("Cedel") or the Euroclear System
("Euroclear"), in Europe). Transfers
within DTC (, Cedel or Euroclear, as the
case may be,) will be in accordance with
the usual rules and operating procedures
of the relevant system. So long as the
Securities are Book-Entry Securities, such
Securities will be evidenced by one or
more securities registered in the name of
Cede & Co. ("Cede"), as the nominee of DTC
(or one of the relevant depositaries).
Cross-market transfers between Persons
holding directly or indirectly through
DTC(, on the one hand, and counterparties
holding directly or indirectly through
Cedel or Euroclear, on the other,) will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Company of New York ("Morgan"), the
relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC. The
Securities will initially be registered in
the name of Cede. The interests of such
Holders will be represented by book
entries on the records of DTC and
participating members thereof. No Holder
of a Security will be entitled to receive
a definitive note representing such
Person's interest, except in the event
that Securities in fully registered,
certificated form ("Definitive
Securities") are issued under the limited
circumstances described in "Description of
the Securities--General" in the
Prospectus. All references in this
Prospectus Supplement to Securities
reflect the rights of Holders of such
Notes only as such rights may be exercised
through DTC and its participating
organizations for so long as such
Securities are held by DTC. See
"Description of the Securities--Book-Entry
Securities" herein.
H. Denominations . . . . . The Notes will be issued in minimum
denominations of $_______ and integral
multiples of $______ in excess thereof.
The Certificates will be issued in minimum
denominations of $_______ and integral
multiples of $______ in excess thereof.
(Letter of Credit)
(Surety Bond)
Issuer . . . . . . . . . . _________________ (the "(Letter of Credit)
(Surety Bond) Issuer"). See "The (Letter
of Credit) (Surety Bond) Issuer" herein.
(Letter of Credit)
(Surety Bond) . . . . . . . On the Closing Date, the (Letter of
Credit) (Surety Bond) Issuer will issue a
(letter of credit) (surety bond) (the
"(Letter of Credit) (Surety Bond)") in
favor of the Owner Trustee on behalf of
the Trust. In the event that on any
Distribution Date, available amounts on
deposit in the Collection Account with
respect to the preceding Collection Period
are insufficient to provide for the
payment of the amount required to be
distributed to the Holders and the
Servicer on such Distribution Date, the
Owner Trustee will draw on the (Letter of
Credit) (Surety Bond) to the extent of the
(Letter of Credit) (Surety Bond) Amount
for such Distribution Date, in an amount
equal to such deficiency. See
"Description of the Securities--
Distributions" herein and "Enhancement" in
the Prospectus.
((Letter of Credit)
(Surety Bond)
Amount . . . . . . . . . . The amount available under the (Letter of
Credit) (Surety Bond) (the "(Letter of
Credit) (Surety Bond) Amount") for the
initial Distribution Date will be $
. For each Distribution Date
thereafter, the (Letter of Credit) (Surety
Bond) Amount will equal the lesser of (i)
% of the Pool Balance as of the first
day of the preceding Collection Period
(after giving effect to any amounts
distributed in respect of principal of the
Revolving Credit Line Loans on the
Distribution Date occurring in such
preceding Collection Period) and (ii) the
(Letter of Credit) (Surety Bond) Amount as
of the first day of the preceding
Collection Period, minus any amounts drawn
under the (Letter of Credit) (Surety Bond)
during such preceding Collection Period,
plus any amounts paid to the (Letter of
Credit) (Surety Bond) Issuer on the
Distribution Date occurring in such
preceding Collection Period up to the
amount of any previous draws on the
(Letter of Credit) (Surety Bond).)
Servicing . . . . . . . . . . . . The Servicer will be responsible for
servicing, managing and making Collections
on the Revolving Credit Line Loans. On
the ________ business day, but no later
than the _______ calendar day, of each
month (each, a "Determination Date"), the
Servicer will calculate, and will instruct
the related Trustee regarding, the amounts
to be paid, as described herein, with
respect to the related Collection Period,
to the related Holders. See "Description
of the Securities--Distributions" herein.
The Servicer will receive a monthly
servicing fee in the amount of ____% per
annum (the "Servicing Fee Rate") of the
related Pool Balance, and certain other
amounts, as servicing compensation from
the Trust. See "Servicing of the
Revolving Credit Line Loans--Servicing
Compensation and Payment of Expenses"
herein. In certain limited circumstances,
the Servicer may resign or be removed, in
which event either the Owner Trustee or a
third-party servicer will be appointed as
successor Servicer. See "Servicing of the
Loans--Certain Matters Regarding the
Servicer" and "The Agreements--Events of
Default; Rights Upon Events of Default" in
the Prospectus.
(Final Payment of Principal;
Termination . . . . . . . . The Trust will terminate on the
Distribution Date following the earlier of
(i) ______________ and (ii) the final
payment or other liquidation of the last
Revolving Credit Line Loan and Private
Security in the Trust. The Revolving
Credit Line Loans will be subject to
optional repurchase by the Servicer on any
Distribution Date after the aggregate
Principal Balance thereof is reduced to an
amount less than or equal to
$ ((5)% of the initial Principal
Balance). The Repurchase Price will be
equal to the sum of the aggregate
Principal Balance of the Revolving Credit
Line Loans and accrued and unpaid interest
thereon at the weighted average of the
Loan Rates through the day preceding the
Final Scheduled Distribution Date. See
"Description of the Securities--Optional
Termination" herein and "The Agreements--
Termination" in the Prospectus.)
Certain Federal Income Tax
Considerations . . . . . . . . . In the opinion of Tax Counsel, for federal
income tax purposes, the Notes will be
characterized as indebtedness, and the
Trust will not be characterized as an
association (or publicly traded
partnership) taxable as a corporation.
Each Holder of a Note, by its acceptance
of a Note, will agree to treat such Note
as indebtedness for federal, state and
local income and franchise tax purposes.
See "Certain Federal Income Tax
Considerations" and "State Tax
Considerations" herein and in the
Prospectus concerning the application of
federal, state and local tax laws.
Legal Investment . . . . . . . . The Securities will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"), because not all of the
Mortgages securing the Revolving Credit
Line Loans are first mortgages.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based solely on first mortgages
may not be legally authorized to invest in
the Securities. See "Legal Investment
Considerations" herein and "Legal
Investment" in the Prospectus.
ERISA . . . . . . . . . . . . . . Generally, Plans that are subject to the
requirements of ERISA and the Code are
permitted to purchase instruments similar
to the Notes that are debt under
applicable state law and have no
"substantial equity features" without
reference to the prohibited transaction
requirements of ERISA and the Code. In
the opinion of ERISA Counsel (as defined
herein), the Notes will be classified as
indebtedness without substantial equity
features for ERISA purposes. However, if
the Notes were to be deemed to be equity
interests and no statutory, regulatory or
administrative exemption were to apply,
the Trust will hold plan assets by reason
of a Plan's investment in the Notes.
Accordingly, any Plan fiduciary
considering whether to purchase the Notes
on behalf of a Plan should consult with
its counsel regarding the applicability of
the provisions of ERISA and the Code and
the availability of any exemptions. Under
current law, the purchase and holding of
the Certificates by or on behalf of any
employee benefit plan (each, a "Plan")
subject to the fiduciary responsibility
provisions of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), may result in a "prohibited
transaction" within the meaning of ERISA
and the Code or other violation of the
fiduciary responsibility provisions of
ERISA and Section 4975 of the Code.
(Consequently, the Certificates may not
be transferred to a proposed transferee
that is a Plan subject to ERISA or that is
described in Section 4975(e)(1) of the
Code, or a Person acting on behalf of any
such Plan or using the assets of such
Plan, unless the Owner Trustee and the
Depositor receive an opinion of counsel
reasonably satisfactory to the Owner
Trustee and the Depositor to the effect
that the purchase and holding of such
Certificates will not result in the assets
of the Trust being deemed to be "plan
assets" for ERISA purposes and will not be
a prohibited transaction under ERISA or
Section 4975 of the Code.) See "ERISA
Considerations" herein and in the
Prospectus.
Rating . . . . . . . . . . . . . It is a condition to the issuance of the
Securities that they be rated _______ by
at least ____ nationally recognized
statistical rating organizations (each, a
"Rating Agency"). In general, ratings
address credit risk and do not address the
likelihood of prepayments. A security
rating is not a recommendation to buy,
sell or hold securities.
RISK FACTORS
(CASH FLOW CONSIDERATIONS
During the first ____-year draw down period under the related Revolving
Credit Line Loan Agreements for the Revolving Credit Line Loans, Collections
on such Revolving Credit Line Loans may vary because, among other things,
borrowers are not required to make monthly payments of principal. With
respect to some of the Revolving Credit Line Loans, during the second
____-year draw down period, no monthly payments of principal are required.
Collections on the Revolving Credit Line Loans may also vary due to seasonal
purchasing and payment habits of borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans,
since no payment of principal generally is required until after either a
five- or ten-year interest-only period under the related Revolving Credit
Line Loan Agreements. Minimum monthly payments will at least equal and may
exceed accrued interest. Even assuming that the Mortgaged Properties provide
adequate security for the Revolving Credit Line Loans, substantial delay
could be encountered in connection with the liquidation of Revolving Credit
Line Loans that are delinquent and corresponding delays in the receipt of
related proceeds by Holders could occur if the (Letter of Credit) (Surety
Bond) provider were unable to perform on its obligations under the (Letter of
Credit) (Surety Bond). Further, liquidation expenses (such as legal fees,
real estate taxes, and maintenance and preservation expenses) will reduce the
Liquidation Proceeds payable to Holders and thereby reduce the security for
the Revolving Credit Line Loans. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Revolving Credit
Line Loans, Holders could experience a loss if the (Letter of Credit) (Surety
Bond) provider were unable to perform its obligations under the (Letter of
Credit) (Surety Bond).)
PREPAYMENT CONSIDERATIONS
All of the Revolving Credit Line Loans may be prepaid in whole or in
part at any time without penalty. Home equity loans, such as the Revolving
Credit Line 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. The Trust's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Revolving Credit Line Loans contain due-on-sale
provisions and the Servicer intends to enforce such provisions unless (i)
such enforcement is not permitted by applicable law or (ii) the Servicer, in
a manner consistent with reasonable commercial practice, permits the
purchaser of the related Mortgaged Property to assume the Revolving Credit
Line Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such
Revolving Credit Line Loan. See "Certain Legal Aspects of the Loans--
Due-on-Sale Clauses in Revolving Credit Line Loans" in the Prospectus.
LEGAL CONSIDERATIONS
The Revolving Credit Line Loans are secured by deeds of trust or
Mortgages. With respect to Revolving Credit Line Loans that are secured by
first Mortgages, the Servicer has the power under certain circumstances to
consent to a new mortgage lien on the Mortgaged Property having priority over
such Revolving Credit Line Loan. Revolving Credit Line Loans secured by
senior Mortgages are entitled to proceeds that remain from the sale of the
related Mortgaged Property after any related senior mortgage loan and prior
statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate (and the
(Letter of Credit) (Surety Bond) provider is unable to perform its
obligations under the (Letter of Credit) (Surety Bond) or if the coverage
under the (Letter of Credit) (Surety Bond) is exhausted), the Trust, and
accordingly, the Holders, bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment cannot be obtained or is not realized upon.
See "Certain Legal Aspects of the Loans" in the Prospectus.
The sale of the Revolving Credit Line Loans from the Seller to the
Depositor pursuant to the Purchase Agreement will be treated as a sale of the
Revolving Credit Line Loans. The Seller will warrant that such transfer is
either a sale of its interest in the Revolving Credit Line Loans or a grant
of a first priority perfected security interest therein. In the event of an
insolvency of the Seller, the receiver of the Seller may attempt to
recharacterize the sale of the Revolving Credit Line Loans as a borrowing by
the Seller secured by a pledge of the Revolving Credit Line Loans. If the
receiver decided to challenge such transfer, delays in payments of the
Securities and possible reductions in the amount thereof could occur. The
Depositor will warrant in the Trust Agreement that the transfer of its
interest in the Revolving Credit Line Loans to the Trust is a valid transfer
and assignment of such interest.
If a conservator, receiver or trustee were appointed for the Seller, or
if certain other events relating to the bankruptcy or insolvency of the
Seller were to occur, Additional Balances would not be transferred by the
Seller to the Trust pursuant to the Purchase Agreement (as assigned by the
Depositor to the Trust). In such an event, an Event of Default under the
Trust Agreement and Indenture would occur and the Owner Trustee would attempt
to sell the Revolving Credit Line Loans (unless Holders of Securities
evidencing undivided interests aggregating at least 51% of each of the Note
Balance and the Certificate Balance instruct otherwise), thereby causing
early payment of the respective Security Balances of the Notes and the
Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the related
bankruptcy trustee or receiver may have the power to prevent the Owner
Trustee or the Holders from appointing a successor Servicer.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE REVOLVING CREDIT LINE LOANS
The Servicer may agree to changes in the terms of a Revolving Credit
Line Loan Agreement, provided that such changes (i) do not adversely affect
the interests of the Holders and (ii) are consistent with prudent business
practice. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not
result in changes in the terms of the Revolving Credit Line Loans.
(DELINQUENT REVOLVING CREDIT LINE LOANS
The Trust will include Revolving Credit Line Loans that are 59 or fewer
days delinquent. The Cut-off Date Principal Balance of such delinquent
Revolving Credit Line Loans was $____________.)
THE TRUST
GENERAL
The Issuer, Bear Stearns Home Equity Loan Trust 199__-__, is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. The
Trust Agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the
Issuer will not engage in any activity other than (i) acquiring, holding and
managing the Revolving Credit Line Loans and the other assets of the Trust
and proceeds therefrom, (ii) issuing the Notes and the Certificates, (iii)
making payments on the Notes and the Certificates and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The property of the Trust will consist of: (i) the Revolving Credit
Line Loans; (ii) Collections on the Revolving Credit Line Loans received on
or after the Cut-off Date; (iii) Mortgaged Properties relating to the
Revolving Credit Line Loans that are acquired by foreclosure or deed in lieu
of foreclosure; (iv) the Collection Account and the Distribution Accounts
(excluding, in each case, net earnings thereon); (v) the (Letter of Credit)
(Surety Bond); and (vi) an assignment of the Depositor's rights under the
Purchase Agreement, including all rights of the Depositor to purchase
Additional Balances.
The Trust's principal offices are in __________, Delaware, in care of
_______________, as Owner Trustee, at ____________.
THE (LETTER OF CREDIT) (SURETY BOND) ISSUER
The following information with respect to _________ has been furnished
by __________.
(Description of Letter of Credit/Surety Bond Issuer)
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning ________ and its underwriting
policies has been provided by _________. The Depositor does not make any
representation as to the accuracy or completeness of such information.
GENERAL
The Revolving Credit Line Loans were originated by _____________ (in
such capacity, the "Seller") under its home equity lending program. The
Seller first offered (fixed) (adjustable) rate home equity revolving credit
line loans ("home equity loans") in 19___. As of __________, _______ owned
and serviced approximately $__________ aggregate principal amount of
outstanding home equity loans secured by properties located in __________
under home equity credit lines.
UNDERWRITING PROCEDURES RELATING TO THE REVOLVING CREDIT LINE LOANS
Each Revolving Credit Line Loan was originated after a review by the
Seller in accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such Revolving
Credit Line Loan and the adequacy of the real property that was to serve as
collateral for such Revolving Credit Line Loan. The maximum Credit Limit for
a Revolving Credit Line Loan provided by the Seller was $__________.
Each applicant for a home equity loan was required to complete an
application that listed the applicant's assets, liabilities, income, credit
and employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (i)
received a satisfactory independent credit bureau report on the credit
history of the borrower and (ii) obtained, in the case of all home equity
loans originated prior to ________, 19___, a drive-by appraisal of the
related Mortgaged Property or, for all home equity loans originated as of
_______, 19___, a satisfactory appraisal completed on forms approved by FNMA,
and if such information met the Seller's underwriting standards, the Seller
issued a commitment subject to satisfaction of certain other conditions.
These conditions included: (i) obtaining and reviewing pay stubs, income tax
returns or a verification of employment from the applicant's employer; (ii)
obtaining and reviewing a verification of deposit; and (iii) when the home
equity loan was to be in a junior lien position, obtaining and reviewing a
verification of the loan or loans in a senior lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
___% for loans for which the Seller obtained full documentary support and
___% for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in
the property existed and whether the prospective borrower had sufficient
monthly income available to support the payments of interest at the current
prime rate plus the applicable margin based on the Credit Limit in addition
to any senior mortgage loan payments (including any escrows for property
taxes and hazard insurance premiums) and other monthly credit obligations
based on the prospective borrower's debt-to-gross income ratio. The
"debt-to-gross income ratio" is the ratio of (a) certain of the borrower's
debt obligations, which include: (i) the monthly first mortgage payment plus
taxes; (ii) monthly installment debt payments with a term of more than ten
months; (iii) five percent of the total revolving obligations; (iv) monthly
alimony and child support obligations; and (v) the payment on the home equity
loan calculated at the Credit Limit and current prime rate plus margin for
such home equity loan to (b) the borrower's gross verifiable monthly income.
The debt-to-gross income ratio generally did not exceed ______%.
When the commitment conditions had been satisfied, the Revolving Credit
Line Loan was completed by signing a Revolving Credit Line Loan Agreement,
rescission statement, and Mortgage that secured the repayment of principal of
and interest on the Revolving Credit Line Loan. The original Mortgage was
then recorded in the appropriate county government office.
REVOLVING CREDIT LINE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate, which may change biweekly. Home equity loans
may be subject to a maximum per annum interest rate (the "Maximum Rate") of
______% per annum and in all cases are subject to applicable usury
limitations. See "Certain Legal Aspects of the Loans--Applicability of Usury
Laws" in the Prospectus. The daily periodic rate on the Revolving Credit
Line Loans (the "Loan Rate") is the sum of the Index Rate plus a spread (the
"Margin"), which generally ranges between ____% and ____%, divided by 365
days or 366 days, as applicable.
The "Index Rate" is based on (the prime rate published in the "Money
Rates" section of The Wall Street Journal generally on the Monday of the week
in which such Loan Rate adjusts (or, if no rate is published on such day,
then on the next succeeding calendar day on which a prime rate is published),
rounded to the nearest 1/8 of 1 percent.) The annual percentage rate for any
biweekly period will be based on the prime rate in effect on the Monday on
which the rate may change. (If a prime rate range is published in The Wall
Street Journal, then the midpoint (average) of such range will be used.)
There are no limitations on increases or decreases (except for those
Revolving Credit Line Loans that have Maximum Rates). Only the Revolving
Credit Line Loans that have Maximum Rates of ____% also have annual
adjustment caps of __% as to both increases and decreases in their Loan
Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit
line. Notice of changes in the applicable Loan Rate are provided by the
Seller to the borrower with such statements. All payments are due by the
tenth day after the date the billing statement is issued.
The Revolving Credit Line Loan Agreements further provide that if
publication of the Index Rate is discontinued, the Index Rate will be changed
upon notification in accordance with such Revolving Credit Line Loan
Agreements.
The borrower's right to obtain additional credit may be suspended or
terminated, or the borrower may be required to pay the entire balance due
plus all other accrued but unpaid charges immediately, if (i) the borrower
fails to make any required payment by the due date, (ii) the total
outstanding principal balance including all charges payable exceeds the
Credit Limit, (iii) the borrower made any statement or signature on any
document that is fraudulent or contained a material misrepresentation, (iv)
the borrower dies or becomes incompetent, (v) the borrower becomes bankrupt
or insolvent, (vi) the borrower becomes subject to any judgment, lien or
attachment or any execution is issued against the Mortgaged Property, (vii)
the borrower fails to obtain and maintain required property insurance or
(viii) the borrower sells or transfers the Mortgaged Property or does not
maintain the Mortgaged Property. In addition, the right to obtain additional
credit may be suspended or a borrower's Credit Limit may be reduced, if (i)
the value of the Mortgaged Property decreases for any reason to less than 80%
of the original appraised value, (ii) the borrower is in default under the
Revolving Credit Line Loan Agreement, (iii) government action impairs the
Seller's lien priority or (iv) a regulatory agency has notified the Seller
that continued advances would constitute an unsafe and unsound practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table.
The Servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the
following tables. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Revolving Credit Line Loans will be similar to
that set forth below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
As of _________
---------------------------------
Number of Loans Amount
------------------- ----------
Amount Outstanding at
Period End . . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . . ______
Total Delinquencies . . . . . . . . . . . $_____
30-59 Days Percentage . . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . . %
90 or More Days Percentage . . . . . . . %
Foreclosures and Bankruptcies . . . . . .
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
For the Year
Ending ________
-------------------
Average Amount
Outstanding . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . %
SERVICING OF THE REVOLVING CREDIT LINE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such
information.
GENERAL
The Servicer will be responsible for servicing the Revolving Credit Line
Loans as agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the terms
of the Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior
lien is received by the Servicer; or (iii) if circumstances are discovered by
the Servicer that would indicate that a potential for loss exists.
Foreclosure proceedings may be terminated if the delinquency is cured.
However, under certain circumstances, the Servicer may elect not to commence
foreclosure or stay the foreclosure proceeding if the borrower's default is
due to special circumstances that are temporary and are not expected to last
beyond a specified period. The loans to borrowers in bankruptcy proceedings
will be restructured in accordance with law and with a view to maximizing
recovery of such home equity loans, including any deficiencies.
Additionally, at any time during foreclosure, a forbearance, short sale, deed
in lieu of foreclosure or payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, which will liquidate
the Mortgaged Property and charge off the balance of the home equity loan
that was not recovered by the Liquidation Proceeds. If the Mortgaged
Property was subject to a senior lien position, the Servicer will either
satisfy such lien at the time of foreclosure or take other action as deemed
necessary to protect the Servicer's interest in the Mortgaged Property. If,
in the judgment of the Servicer, the cost of maintaining or purchasing the
senior lien position exceeds the economic benefit of such action, the
Servicer will generally charge off the entire home equity loan, will seek a
money judgment against the borrower or will not pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable
laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Revolving Credit Line Loans will be
paid to it from Interest Collections in respect of the Revolving Credit Line
Loans and will be equal to ____% per annum (the "Servicing Fee Rate") on the
Pool Balance as of the first day of each such Collection Period (the
"Servicing Fee"). With respect to the first Collection Period, the Servicer
will receive from such Collections ____% of the amount calculated in the
preceding sentence. All 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
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Revolving Credit Line Loans and in connection with the restoration
of Mortgaged Properties related thereto, such right of reimbursement being
prior to the rights of Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE REVOLVING CREDIT LINE LOANS
REVOLVING CREDIT LINE LOANS
The Revolving Credit Line Loans were originated pursuant to loan
agreements and disclosure statements (the "Revolving Credit Line Loan
Agreements") and are secured by Mortgages or deeds of trust on Mortgaged
Properties. The Mortgaged Properties securing the Revolving Credit Line
Loans consist primarily of residential properties that are one to four-family
properties. ____% of the Mortgaged Properties are owner-occupied. See "--
Revolving Credit Line Loan Pool Statistics."
The Cut-off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balance of the Revolving Credit Line Loans as of ______,
199__ (the "Cut-off Date"). As of the Cut-off Date, the Revolving Credit
Line Loans were not more than 59 days delinquent and had a Loan Rate of at
least ____% per annum. The average Cut-off Date Principal Balance was
$_______, the minimum Cut-off Date Principal Balance was zero, the maximum
Cut-off Date Principal Balance was $_______, the minimum Loan Rate and the
maximum Loan Rate on the Cut-off Date were ____% and ____% per annum,
respectively, and the weighted average Loan Rate on the Cut-off Date was
____% per annum. As of the Cut-off Date, the weighted average Credit Limit
Utilization Rate was ____%, the minimum Credit Limit Utilization Rate was
zero and the maximum Credit Limit Utilization Rate was ____%. The "Credit
Limit Utilization Rate" is determined by dividing the Cut-off Date Principal
Balance of a Revolving Credit Line Loan by the Credit Limit of the related
Revolving Credit Line Loan Agreement. The weighted average Combined
Loan-to-Value Ratio of the Revolving Credit Line Loans was ____% as of the
Cut-off Date.
REVOLVING CREDIT LINE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-off Date with respect to the Revolving Credit Line Loans to be
included in the Trust.
(TABULAR INFORMATION)
ASSIGNMENT OF REVOLVING CREDIT LINE LOANS
At the time of issuance of the Securities, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Revolving
Credit Line Loan (including its right to purchase any Additional Balances
arising in the future), the related Revolving Credit Line Loan Agreements,
Mortgages and other related documents (collectively, the "Related Documents")
and all Collections received on or with respect to each such Revolving Credit
Line Loan on or after the Cut-off Date pursuant to an assignment of the
Depositor's rights and obligations under the Purchase Agreement. The related
Trustee, concurrently with such transfer, will deliver the Securities. Each
Revolving Credit Line Loan transferred to the Owner Trust will be identified
on a schedule (the "Revolving Credit Line Loan Schedule") delivered to the
Owner Trustee pursuant to the Purchase Agreement. Such schedule will include
information as to the Cut-off Date Principal Balance of each Revolving Credit
Line Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require, within the time period specified
therein, the Seller to deliver to the Owner Trustee (or a custodian, as the
Owner Trustee's agent for such purpose) the Revolving Credit Line Loans
endorsed in blank and the Related Documents. In lieu of delivery of original
Mortgages, the Seller may deliver true and correct copies thereof that have
been certified as to authenticity by the appropriate county recording office
where such Mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have (___ days after the Closing Date) to prepare
and record assignments of the Mortgages related to each Revolving Credit Line
Loan in favor of the Owner Trustee, unless opinions of counsel satisfactory
to the Rating Agencies and the Insurer are delivered to the Owner Trustee and
the Insurer to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Owner
Trustee in the Revolving Credit Line Loans.
Within 90 days after the Closing Date, the Owner Trustee will review the
Revolving Credit Line Loans and the Related Documents, and if any Revolving
Credit Line 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 and the Depositor by the Owner Trustee, the Seller will
be obligated to repurchase such defective Revolving Credit Line Loan and to
deposit the Repurchase Price into the Collection Account. Upon such
retransfer, the Principal Balance of such Revolving Credit Line Loan will be
deducted from the Pool Balance. In lieu of any such repurchase, the Seller
may substitute an Eligible Substitute Revolving Credit Line Loan. Any such
repurchase or substitution will be considered a payment in full of such
Revolving Credit Line Loan. The obligation of the Seller to accept a
transfer of a Defective Revolving Credit Line Loan is the sole remedy
regarding any defects in the Revolving Credit Line Loans and Related
Documents available to the Owner Trustee or the Holders.
With respect to any Revolving Credit Line Loan, the "Repurchase Price"
is equal to the Principal Balance of such Revolving Credit Line Loan at the
time of any transfer described above plus accrued and unpaid interest thereon
to the date of repurchase.
An "Eligible Substitute Revolving Credit Line Loan" is a Revolving
Credit Line Loan substituted by the Seller for a Defective Revolving Credit
Line Loan that must, on the date of such substitution, (i) have a Principal
Balance (or in the case of a substitution of more than one Revolving Credit
Line Loan for a Defective Revolving Credit Line Loan, an aggregate Principal
Balance), not 5% more or less than the Principal Balance relating to such
Defective Revolving Credit Line Loan; (ii) have a Loan Rate not less than the
Loan Rate of the Defective Revolving Credit Line Loan and not more than 1% in
excess of the Loan Rate of such Defective Revolving Credit Line Loan; (iii)
have a Loan Rate based on the same index with adjustments to such Loan Rate
made on the same date of adjustment of the Loan Rate as that of the Defective
Revolving Credit Line Loan; (iv) have a Margin that is not less than the
Margin of the Defective Revolving Credit Line Loan and not more than 100
basis points higher than the Margin for the Defective Revolving Credit Line
Loan; (v) have a mortgage of the same or higher level of priority as the
Mortgage relating to the Defective Revolving Credit Line Loan; (vi) have a
remaining term to maturity not more than six months earlier and not later
than the remaining term to maturity of the Defective Revolving Credit Line
Loan; (vii) comply with each representation and warranty as to the Revolving
Credit Line Loans set forth in the Purchase Agreement (deemed to be made as
of the date of substitution); and (viii) satisfy certain other conditions
specified in the Purchase Agreement. To the extent the Principal Balance of
an Eligible Substitute Revolving Credit Line Loan is less than the Principal
Balance of the related Defective Revolving Credit Line Loan, the Seller will
be required to make a deposit to the Collection Account equal to such
difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Owner Trustee with respect to each Revolving Credit Line Loan (e.g., Cut-off
Date Principal Balance and Loan Rate). In addition, the Seller will
represent and warrant on the Closing Date that, among other things: (i) at
the time of transfer to the Depositor, the Seller has transferred or assigned
all of its right, title and interest in and to each Revolving Credit Line
Loan and the Related Documents, free of any lien (subject to certain
exceptions); and (ii) each Revolving Credit Line Loan was generated under a
Revolving Credit Line Loan Agreement that complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty that
materially and adversely affects the interests of the Holders in the related
Revolving Credit Line Loan and Related Documents, the Seller will have a
period of 60 days after discovery or notice of such breach to effect a cure.
If the breach cannot be cured within such 60-day period, the Seller will be
obligated to substitute such Defective Revolving Credit Line Loan or
repurchase such Defective Revolving Credit Line Loan from the Trust. The
same procedure and limitations that are set forth above for the repurchase or
substitution of Defective Revolving Credit Line Loans will apply to the
transfer of a Revolving Credit Line Loan that is required to be repurchased
or substituted because of a breach of a representation or warranty in the
Purchase Agreement that materially and adversely affects the interests of the
Holders.
Revolving Credit Line Loans required to be transferred to the Seller as
described in the preceding paragraphs are referred to as "Defective Revolving
Credit Line Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer will establish and maintain on behalf of the Owner Trustee
an account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the Servicer
of amounts in respect of the Revolving Credit Line Loans (excluding amounts
representing administrative charges, annual fees, 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 into the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Servicing Agreement)
maturing no later than one Business Day prior to the date on which the amount
on deposit therein is required to be deposited into the related Distribution
Account or on such Distribution Date if approved by the Rating Agencies. No
later than the fifth Business Day prior to each Distribution Date (each, a
"Determination Date"), the Servicer will notify the Owner Trustee and the
Indenture Trustee of the amount of such deposit to be included in funds
available for the related Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Holders on a
Distribution Date. The Security Account will be an Eligible Account, and
amounts on deposit therein will 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 debt obligations of which at the time of any
deposit therein have the highest short-term debt rating by the Rating
Agencies, (ii) maintained with a depository institution, which accounts are
fully insured by either the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
established by such fund with a minimum long-term unsecured debt rating of
____, (iii) a segregated trust account maintained with the Owner Trustee or
an affiliate thereof in its fiduciary capacity or (iv) otherwise acceptable
to each Rating Agency as evidenced by a letter from each Rating Agency to the
Owner Trustee, without reduction or withdrawal of their then current ratings
of the Securities.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments that meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Securities.
ALLOCATIONS AND COLLECTIONS
All Collections on the Revolving Credit Line Loans will generally be
allocated in accordance with the Revolving Credit Line Loan Agreements
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Distribution Date, "Interest Collections"
will be equal to the aggregate of the amounts collected during the related
Collection Period, including Liquidation Proceeds, allocated to interest
pursuant to the terms of the Revolving Credit Line Loan Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Liquidation Proceeds, and allocated to principal pursuant to the
terms of the Revolving Credit Line Loan Agreements and (ii) any Substitution
Adjustment Amounts. "Liquidation Proceeds" with respect to a Revolving
Credit Line Loan are equal to the aggregate of all amounts received upon
liquidation of such Revolving Credit Line Loan, including, without
limitation, insurance proceeds, reduced by related liquidation expenses, but
not including the portion, if any, of such amount that exceeds the Principal
Balance of such Revolving Credit Line Loan at the end of the Collection
Period immediately preceding the Collection Period in which such Revolving
Credit Line Loan became a liquidated Revolving Credit Line Loan, plus accrued
and unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Revolving Credit Line Loans as of
such date. The Principal Balance of a Revolving Credit Line Loan (other than
a liquidated Revolving Credit Line Loan) on any day is equal to the Cut-off
Date Principal Balance thereof, plus (i) any Additional Balances in respect
of such Revolving Credit Line Loan minus (ii) all Collections credited
against the Principal Balance of such Revolving Credit Line Loan in
accordance with the related Revolving Credit Line Loan Agreement prior to
such day. The Principal Balance of a liquidated Revolving Credit Line Loan
after final recovery of related Liquidation Proceeds shall be zero.
HAZARD INSURANCE
The Servicing Agreement provides that the Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Revolving Credit
Line Loans. While the terms of the related Revolving Credit Line Loan
Agreements generally require borrowers to maintain certain hazard insurance,
the Servicer will not monitor the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Revolving Credit Line Loan acquired upon
foreclosure of a Revolving Credit Line Loan, or by deed in lieu of such
foreclosure, hazard insurance with extended coverage in an amount equal to
the lesser of (i) the maximum insurable value of such Mortgaged Property or
(ii) the outstanding balance of such Revolving Credit Line Loan plus the
outstanding balance on any mortgage loan senior to such Revolving Credit Line
Loan at the time of foreclosure or deed in lieu of foreclosure, plus accrued
interest and the Servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith. The Servicing Agreement
provides that the Servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy insuring against
losses on such Mortgaged Properties. If such blanket policy contains a
deductible clause, the Servicer will be obligated to deposit into the
Collection Account the sums that would have been deposited therein but for
such clause. The Servicer will initially satisfy these requirements by
maintaining a blanket policy. As set forth above, all amounts collected by
the Servicer (net of any reimbursements to the Servicer) under any hazard
policy (except for amounts to be applied to the restoration or repair of the
Mortgaged Property) will ultimately be deposited into the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm, hail and the like, and
strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Revolving
Credit Line Loans will be underwritten by different insurers and therefore
will not contain identical terms and conditions, the basic terms thereof are
dictated by state laws and most of such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reactions, 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 or an exact
description of the insurance policies relating to the Mortgaged Properties.
REALIZATION UPON DEFAULTED REVOLVING CREDIT LINE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Revolving Credit Line
Loans as come into default when, in accordance with applicable servicing
procedures under the Servicing Agreement, no satisfactory arrangements 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 that the Servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, such foreclosure,
correction or restoration will increase the related Liquidation Proceeds.
The Servicer will be reimbursed out of Liquidation Proceeds for advances of
its own funds as liquidation expenses before any Liquidation Proceeds are
distributed to the Holders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from Interest Collections in respect of the
Revolving Credit Line Loans a portion of such Interest Collections as a
monthly Servicing Fee in the amount equal to the Servicing Fee Rate on the
Pool Balance as of the first day of each such Collection Period. All
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
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Revolving Credit Line Loans and in connection with the restoration
of Mortgaged Properties, such right of reimbursement being prior to the
rights of the Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture, and the Certificates
will be issued pursuant to the Trust Agreement. The following summaries
describe certain provisions of the Securities, the Indenture and the Trust
Agreement. Such summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the
applicable Agreement. As used herein, "Agreement" shall mean either the
Trust Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferrable and exchangeable at the
corporate trust office of, with respect to the Certificates, the Owner
Trustee or, with respect to the Notes, the Indenture Trustee.
BOOK-ENTRY SECURITIES
The Securities will be Book-Entry Securities. Persons acquiring
beneficial ownership interests in the Securities ("Security Owners") will
hold their Securities through DTC in the United States(, or Cedel or
Euroclear (in Europe)) if they are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Securities will be issued in one or more certificates that will
equal the aggregate Security Balance of the Securities and will initially be
registered in the name of Cede, the nominee of DTC. (Cedel and Euroclear
will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books
of their respective depositaries, which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Cedel and the Brussels, Belgium
Branch of Morgan will act as depositary for Euroclear.) Investors may hold
such beneficial interests in the Book-Entry Securities in minimum
denominations of $_______ and integral multiples of $____ in excess thereof.
Except as described below, no Person acquiring a Book-Entry Security will be
entitled to receive a physical certificate representing such Security (each,
a "Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Holder" of the Securities will be Cede, as
nominee of DTC. Security Owners will not be Holders as such term is used in
the Trust Agreement and the Indenture. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
DISTRIBUTIONS
On each Distribution Date, Collections on the Revolving Credit Line
Loans will be applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest on the respective Security Balance of the Notes and the
Certificates;
(iii) as principal of the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and the
Certificates pro rata, based on their respective Security Balances;
(iv) as principal of the Securities, as payment for any Liquidation
Loss Amounts on the Revolving Credit Line Loans;
(v) as payment for the premium for the (Letter of Credit) (Surety
Bond);
(vi) to reimburse prior draws made on the (Letter of Credit)
(Surety Bond); and
(vii) any remaining amounts, to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means, with respect to any liquidated
Revolving Credit Line Loan, the unrecovered Principal Balance thereof at the
end of the Collection Period in which such Revolving Credit Line Loan became
a liquidated Revolving Credit Line Loan, after giving effect to the
Liquidation Proceeds in connection therewith.
INTEREST
Note Rate. Interest will accrue on the Note Balance of the Notes (i) at
the per annum rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and (ii) thereafter, from and including
the preceding Distribution Date to but excluding such current Distribution
Date (each, an "Accrual Period") at (a floating rate equal to LIBOR plus
___%) (___%). (Interest will be calculated on the basis of the actual number
of days in each Accrual Period divided by 360.) A failure to pay interest on
any Notes on any Distribution Date that continues for five days will
constitute an Event of Default under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Certificate
Balance of the Certificates (i) at the per annum rate (the "Pass-Through
Rate") equal to ___% per annum from the Closing Date to the first
Distribution Date and (ii) thereafter, for each Accrual Period at (a floating
rate equal to LIBOR plus ___%) (___%). (Interest will be calculated on the
basis of the actual number of days in each Accrual Period divided by 360.) A
failure to pay interest on any Certificates on any Distribution Date that
continues for five days constitutes an Event of Default under the Trust
Agreement.
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the earlier
of (i) ____________ and (ii) the final payment or other liquidation of the
last Revolving Credit Line Loan in the Trust. The Revolving Credit Line
Loans will be subject to optional repurchase by the Servicer on any
Distribution Date after the aggregate Principal Balance thereof is reduced to
an amount less than or equal to $_________ ((5)% of the initial aggregate
Principal Balance thereof). The Repurchase Price will be equal to the sum of
the Pool Balance and accrued and unpaid interest thereon at the weighted
average of the Loan Rates through the day preceding the Final Scheduled
Distribution Date.
THE INDENTURE
The following summary describes certain terms of the Indenture. Such
summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Indenture. Whenever
particular sections or defined terms of the Indenture are referred to, such
sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a summary of certain additional
terms of the Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
request, at its address listed on the Note Register maintained with the
Indenture Trustee, a report setting forth certain amounts relating to the
Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, Events of Default under the Indenture will
consist of: (i) a default for five days or more in the payment of any
interest on any Note; (ii) a default in the payment of the principal of or
any installment of the principal of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Trust made in the Indenture and the continuation of any such
default for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding; (iv) any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in any material respect as of the time made,
and such breach not having been cured within 30 days after notice thereof is
given to the Trust by the Indenture Trustee or to the Trust and the Indenture
Trustee by the Holders of at least 25% in aggregate principal amount of Notes
then outstanding; or (v) certain events of bankruptcy, insolvency,
receivership or liquidation of the Trust. (The amount of principal required
to be paid to Noteholders under the Indenture will generally be limited to
amounts available to be deposited into the Collection Account. Therefore,
the failure to pay principal of the Notes generally will not result in the
occurrence of an Event of Default until the Final Scheduled Distribution Date
for such Notes.) If there is an Event of Default with respect to a Note due
to late payment or nonpayment of interest due on such Note, additional
interest will accrue on such unpaid interest at the interest rate on such
Note (to the extent lawful) until such interest is paid. Such additional
interest on unpaid interest shall be due at the time such interest is paid.
If there is an Event of Default due to late payment or nonpayment of
principal of a Note, interest will continue to accrue on such principal at
the interest rate on the Note until such principal is paid. If an Event of
Default should occur and be continuing with respect to the Notes, the
Indenture Trustee or the Holders of a majority in aggregate principal amount
of Notes then outstanding may declare the principal of such Notes to be
immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the Holders of a majority in aggregate
principal amount of the Notes then outstanding. If the Notes are due and
payable following an Event of Default with respect thereto, the Indenture
Trustee may institute proceedings to collect amounts due, foreclose on Trust
property or exercise remedies as a secured party. If an Event of Default
occurs and is continuing with respect to the Notes, the Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any Holders of the Notes if the
Indenture Trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities that might be incurred by it in
complying with such request. Subject to the provisions for indemnification
and certain limitations contained in the Indenture, the Holders of a majority
in aggregate principal amount of the outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding or remedy
available to the Indenture Trustee, and the Holders of a majority in
aggregate principal amount of the Notes then outstanding 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 Holders of the outstanding Notes. No Noteholder will have the
right to institute any proceeding with respect to the Indenture, unless (i)
such Noteholder previously has given the Indenture Trustee written notice of
a continuing Event of Default, (ii) the Holders of not less than 25% in
aggregate principal amount of the outstanding Notes have made written request
to the Indenture Trustee to institute such proceeding in its own name as
Indenture Trustee, (iii) such Noteholder or Noteholders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent
with such written request has been given to the Indenture Trustee during the
60-day period by the Holders of a majority in aggregate principal amount of
the Notes. In addition, the Indenture Trustee and the Noteholders, by
accepting the Notes, will covenant that they will not at any time institute
against the Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law. With respect to the Trust,
neither the Indenture Trustee or the Owner Trustee in their respective
individual capacities, any Holder of a Certificate representing an ownership
interest in the Trust nor any of their respective owners, beneficiaries,
agents, officers, directors, employees, affiliates, successors or assigns
will, in the absence of an express agreement to the contrary, be personally
liable for the payment of the principal of or interest on the Notes or for
the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be
continuing immediately after such merger or consolidation, (iv) the Trust has
been advised that the ratings of the Securities then in effect would not be
reduced or withdrawn by any Rating Agency as a result of such merger or
consolidation and (v) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Trust or to any Holder. The Trust will not, among other
things, (i) except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, (ii) claim
any credit on or make any deduction from the principal and interest payable
in respect of the Notes (other than amounts withheld under the Code or
applicable state law) or assert any claim against any present or former
Noteholder because of the payment of taxes levied or assessed upon the Trust,
(iii) dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture to be impaired or permit any Person to be
released from any covenants or obligations with respect to the Notes under
the Indenture except as may be expressly permitted thereby or (v) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden the assets of
the Trust or any part thereof, or any interest therein or the proceeds
thereof. The Trust may not engage in any activity other than as specified
under "The Trust" herein. The Trust will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any
amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of any indebtedness owing by the Trust to the Indenture Trustee
in its individual capacity, any change in the property and funds physically
held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported, but
if no such changes have occurred, then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the Indenture Trustee for cancellation of all
Notes or, with certain limitations, upon deposit with the Indenture Trustee
of funds sufficient for the payment in full of all Notes.
MODIFICATION OF INDENTURE
With the consent of the Holders of a majority in aggregate principal
amount of the Notes then outstanding, the Trust and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any manner
or eliminate any provisions of, the Indenture, or modify (except as provided
below) in any manner the rights of the Noteholders. Without the consent of
the Holder of each outstanding Note affected thereby, however, no
supplemental indenture may: (i) change the due date of any installment of
principal of or interest on any Note or reduce the principal amount thereof,
the interest rate specified thereon or the redemption price with respect
thereto or change any place of payment where or the coin or currency in which
any Note or any interest thereon is payable; (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment; (iii) reduce the percentage of the aggregate amount of the
outstanding Notes, the consent of the Holders of which is required for any
supplemental indenture or the consent of the Holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture; (iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the Trust, the Depositor or an affiliate thereof; (v)
decrease the percentage of the aggregate principal amount of Notes required
to amend the sections of the Indenture that specify the applicable percentage
of aggregate principal amount of the Notes necessary to amend the Indenture
or certain other related agreements; or (vi) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect
to any of the collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the Holder of any Note of the security afforded by
the lien of the Indenture. The Trust and the Indenture Trustee may also
enter into supplemental indentures without obtaining the consent of the
Noteholders, for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of the
Indenture or modifying in any manner the rights of the Noteholders; provided,
that such action will not materially and adversely affect the interests of
any Noteholder.
VOTING RIGHTS
At all times, the voting rights of the Noteholders under the Indenture
will be allocated among the Notes pro rata in accordance with their
outstanding Note Balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Indenture or for errors in judgment; provided, however, that none of the
Indenture Trustee, the Depositor or any director, officer or employee thereof
will be protected against any liability that would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the
Indenture Trustee will be indemnified by the Trust and held harmless against
any loss, liability or expense incurred in connection with investigating,
preparing to defend or defending any legal action, commenced or threatened,
relating to the Indenture other than any loss, liability or expense incurred
by reason of willful malfeasance, bad faith or gross negligence in the
performance of its duties under the Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. Any such
indemnification by the Trust will reduce the amount distributable to the
Noteholders. All Persons into which the Indenture Trustee may be merged or
with which it may be consolidated or any Person resulting from such merger or
consolidation shall be the successor of the Indenture Trustee under the
Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
Such summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the Trust Agreement.
Whenever particular sections or defined terms of the Trust Agreement are
referred to, such sections or defined terms are thereby incorporated herein
by reference. See "Description of the Securities" herein for a summary of
certain additional terms of the Trust Agreement.
REPORTS TO HOLDERS
Concurrently with each distribution to the Certificateholders, the
Servicer will forward to the Owner Trustee for mailing to such
Certificateholder a statement setting forth:
(i) the amount of interest included in such distribution and the
related Pass-Through Rate;
(ii) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding Collection
Period;
(ix) the number and aggregate Principal Balances of the Revolving
Credit Line 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 Collection Period; and
(x) the book value of any real estate acquired by the Trust
through foreclosure or deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv) and
(v) above, the amounts shall be expressed as a dollar amount per Certificate
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will be
required to forward to the Owner Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for such
calendar year.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner
Trustee without consent of the Certificateholders to cure any ambiguity, to
correct or supplement any provision or for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
thereof or of modifying in any manner the rights of such Certificateholders;
provided, however, that such action will not, as evidenced by an opinion of
counsel satisfactory to the Owner Trustee, adversely affect in any material
respect the interests of any Certificateholders. The Trust Agreement may
also be amended by the Depositor and the Owner Trustee with the consent of
the Holders of Certificates evidencing at least a majority in aggregate
principal amount of then outstanding Certificates and Certificateholders
owning Voting Interests aggregating not less than a majority of the aggregate
Voting Interests for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Trust Agreement or
modifying in any manner the rights of the Holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any Person, any of the
following events or actions: certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with
respect to such Person; and certain actions by such Person indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations. Upon termination of the Trust, the Owner Trustee shall
direct the Indenture Trustee promptly to sell the assets of the Trust (other
than the Collection Account) in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from any such sale, disposition
or liquidation of the Revolving Credit Line Loans will be treated as
Collections on the Revolving Credit Line Loans and will be deposited into the
Collection Account. The Trust Agreement will provide that the Owner Trustee
does not have the power to commence a voluntary proceeding in bankruptcy with
respect to the Trust without the unanimous prior approval of all Holders
(including the Depositor) and the delivery to the Owner Trustee by each
Holder (including the Depositor) of a certificate certifying that the Holder
reasonably believes that the Trust is insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Holder in the capacity
of an investor with respect to the Trust) arising out of or based on the
arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate Certificate Balance of all Certificates
then outstanding will constitute the voting interest of the Issuer (the
"Voting Interest"), except that, for purposes of determining Voting
Interests, Certificates owned by the Issuer or its affiliates (other than the
Depositor) will be disregarded and deemed not to be outstanding; and except
that, in determining whether the Owner Trustee is protected in relying upon
any such request, demand, authorization, direction, notice, consent or
waiver, only Certificates the Owner Trustee knows to be so owned will be so
disregarded. Certificates so owned that have been pledged in good faith may
be regarded as outstanding if the pledgee thereof establishes to the
satisfaction of the Owner Trustee the pledgor's right so to act with respect
to such Certificates and that the pledgee is not the Issuer or as affiliate
thereof.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Trust Agreement or for
errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor or any director, officer or employee thereof will be protected
against any liability that would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Trust
Agreement. Subject to certain limitations set forth in the Trust Agreement,
the Owner Trustee and any director, officer, employee or agent of the Owner
Trustee shall be indemnified by the Trust and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to
the Trust Agreement other than any loss, liability or expense incurred by
reason of willful malfeasance, bad faith or gross negligence in the
performance of its duties under such Trust Agreement or by reason of reckless
disregard of its obligations and duties under the Trust Agreement. Any such
indemnification by the Trust will reduce the amount distributable to the
Holders. All Persons into which the Owner Trustee may be merged or with
which it may be consolidated or any Person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
ADMINISTRATION AGREEMENT
The _______________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
________ is the Indenture Trustee under the Indenture. The mailing
address of the Indenture Trustee is ______, Attention:
___________________________.
THE OWNER TRUSTEE
_______ is the Owner Trustee under the Trust Agreement. The mailing
address of the Owner Trustee is _______, Attention:
_____________________________.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Revolving Credit Line Loans.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Tax Counsel, for federal income tax purposes, the
Notes will be characterized as indebtedness, and the Trust will not be
characterized as an association (or a publicly-traded partnership) taxable as
a corporation. Each Holder of a Note, by its acceptance of a Note, will
agree to treat such Note as indebtedness for federal, state and local income
and franchise tax purposes.
Prospective purchasers should see "Certain Federal Income Tax
Considerations" in the Prospectus for a discussion of the application of
certain federal income and state tax laws to the Trust and the Securities.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations" herein and in the Prospectus, potential
investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities offered hereunder.
State income tax law may differ substantially from the corresponding federal
tax law, and the tax considerations set forth herein and in the Prospectus do
not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of investments in the
Securities offered hereunder. See "State Tax Considerations" in the
Prospectus.
ERISA CONSIDERATIONS
PROHIBITED TRANSACTIONS
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of
ERISA) on parties in interest that engage in nonexempt prohibited
transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a
Plan for purposes of ERISA and the prohibited transaction provisions of the
Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any Person who exercises
control over such assets would be subject to ERISA's fiduciary standards.
Under the Plan Asset Regulation, generally when a Plan invests in another
entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan
Asset Regulation provides that, if a Plan acquires an "equity interest" in an
entity that is neither a "publicly-offered security" (as defined therein) nor
a security issued by an investment company registered under the Investment
Company Act of 1940, the assets of the entity will be treated as assets of
the Plan investor unless certain exceptions apply. If the
(Notes/Certificates) were deemed to be equity interests and no statutory,
regulatory or administrative exemption were to apply, the Trust could be
considered to hold plan assets by reason of a Plan's investment in the
(Notes) (Certificates). Such plan assets would include an undivided interest
in any assets held by the Trust. In such an event, the Owner Trustee and
other Persons, in providing services with respect to the Trust's assets, may
be parties in interest with respect to such Plans, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code
with respect to transactions involving the Trust's assets. (Under the Plan
Asset Regulation, the term "equity interest" is defined as any interest in an
entity other than an instrument that is treated as indebtedness under
"applicable local law" and that has no "substantial equity features." If the
Notes constitute debt without substantial equity features for purposes of the
Plan Assets Regulation, then a Plan's acquisition of Notes will not cause the
assets of the Issuer to be deemed assets of such Plan for purposes of
sections 404 and 406 of ERISA or section 4975 of the Code, and the Plan's
interest will be deemed solely to include an interest in such Notes.
Conversely, if the Notes do not constitute debt without substantial equity
features for purposes of the Plan Assets Regulation, then a Plan's
acquisition of Notes may cause the assets of the Issuer to be deemed to be
assets of such Plan for purposes of sections 404 and 406 of ERISA and section
4975 of the Code. In such event, ERISa's fiduciary provisions (including the
prohibited transaction restrictions of section 406 of ERISA) and section 4975
of the Code might apply to transactions involving the assets of the Issuer.
Although the Notes generally will be treated as debt for federal income tax
purposes, no assurance can be given that such Notes will or will not
constitute debt without substantial equity features for purposes of the Plan
Assets Regulations. If the Notes were deemed to be equity interests in the
Trust and no statutory, regulatory or administrative exemption were to apply,
the Trust could be considered to hold plan assets by reason of a Plan's
investment in the Notes.)
THE UNDERWRITERS' EXEMPTION
The Representative believes that the Underwriter Exemption will apply to
the acquisition and holding of the (Notes/Certificates) by Plans and that all
conditions of the Underwriter Exemption other than those within the control
of the investors will be met. See "ERISA Considerations" in the Prospectus.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any
(Notes/Certificates) on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any (Notes/Certificates), a fiduciary of a Plan
should make its own determination as to whether the Trust, as obligor on the
(Notes/Certificates), is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations
and the availability of any other prohibited transaction exemptions.
Purchasers should analyze whether the decision may have an impact with
respect to purchases of the (Notes/Certificates).
LEGAL INVESTMENT CONSIDERATIONS
The Securities will not constitute "mortgage related securities" for
purposes of SMMEA, because not all of the Mortgages securing the Revolving
Credit Line Loans are first mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated securities based solely on
first mortgages may not be legally authorized to invest in the Securities.
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant
interpretive uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether, and to what extent, the Securities will constitute legal
investments for them. The Depositor makes no representation as to the proper
characterization of the Securities for legal investment or financial
institution regulatory purposes or as to the ability of particular investors
to purchase Securities under applicable legal investment restrictions. The
uncertainties described above and any unfavorable future determinations
concerning legal investment or financial institution regulatory
characteristics of the Securities may adversely affect the liquidity of the
Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase from the Depositor, the Securities. The
Underwriters are obligated to purchase all the Securities offered hereby if
any are purchased. Distribution of the Securities will be made by the
Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the
Depositor are expected to be $_________ from the sale of the Notes and
$__________ from the sale of the Certificates, before deducting expenses
payable by the Depositor of $_________. In connection with the purchase and
sale of the Securities, the Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting discounts,
concessions or commissions.
In connection with the offering of the Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of any Class of Securities. Specifically, the Underwriters may overallot the
offering, creating a syndicate short position. The Underwriters may bid for
an purchase the Securities in the open market to cover syndicate short
positions. In addition, the Underwriters may bid for and purchase the
Securities in the open market to stabilize the price of the Securities.
These activities may stabilize of maintain the market price of the Securities
above independent market levels. The Underwriters are not required to engage
in these activities, and may end these activities at any time.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute payments the Underwriters may be required to
make in respect thereof. (Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the
registrant has been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.) The
Depositor is an affiliate of the Representative.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon
for the Depositor by Brown & Wood LLP, New York, New York and for the
Representative by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that each Class of the Notes be rated at
least ____ by _______ and ____ by ________. It is a condition to issuance
that the Certificates be rated at least ____ by _______ and ____ by ________.
A securities rating addresses the likelihood of the receipt by Holders of
distributions on the Revolving Credit Line Loans. The rating takes into
consideration the structural, legal and tax aspects associated with the
Certificates and the Notes. The ratings on the Securities do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. 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.
The ratings assigned by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") to securities address the likelihood of the receipt by the holders
of such securities of all distributions to which they are entitled under the
transaction structure. Duff & Phelps' ratings reflect its analysis of the
riskiness of the related mortgages and its analysis of the structure of the
transaction as set forth in the operative documents. Duff & Phelps' ratings
do not address the effect on yield on the securities attributable to
prepayments or recoveries on the underlying assets.
The ratings assigned by Fitch IBCA, Inc. ("Fitch") to securities address
the likelihood of the receipt of all distributions on the assets by the
related holders of securities under the agreements pursuant to which such
securities are issued. Fitch's ratings take into consideration the credit
quality of the related pool, including any credit support providers, the
structural and legal aspects associated with such securities, and the extent
to which the payment stream on the pool is adequate to make the payments
required by such securities. Fitch's ratings on such securities do not,
however, constitute a statement regarding frequency of prepayments of the
assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of
all distributions to which such holders are entitled. Moody's ratings on
securities do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
holders of securities might suffer a lower than anticipated yield as a result
of prepayments.
The ratings assigned by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), to securities address the likelihood
of the receipt of all distributions on the assets by the related holders of
securities under the agreements pursuant to which such securities are issued.
Standard & Poor's ratings take into consideration the credit quality of the
related pool, including any credit support providers, structural and legal
aspects associated with such securities, and the extent to which the payment
stream on such pool is adequate to make payments required by such securities.
Standard & Poor's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related assets. The
letter "r" attached to a Standard & Poor's rating highlights derivative,
hybrid and certain other types of securities that Standard & Poor's believes
may experience high volatility or high variability in expected returns due to
non-credit risks. The absence of an "r" symbol in the rating of a class of
securities should not be taken as an indication that such securities will
exhibit no volatility or variability in total return.
<TABLE>
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<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE $__,___,___,___
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THEIR RESPECTIVE DATES.
BEAR STEARNS HOME EQUITY LOAN TRUST 199__-__
______________________ $______ (FIXED) (FLOATING) RATE
ASSET BACKED NOTES
TABLE OF CONTENTS $______ (FIXED) (FLOATING) RATE
ASSET BACKED CERTIFICATES,
PAGE
----
PROSPECTUS SUPPLEMENT
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . S-13
The Trust . . . . . . . . . . . . . . . . . . . . . . . . . S-14
The (Letter of Credit) (Surety Bond) Issuer . . . . . . . . S-15
The Home Equity Lending Program . . . . . . . . . . . . . . S-15
Servicing of the Revolving Credit Line Loans . . . . . . . S-18
Description of the Revolving Credit Line Loans . . . . . . S-19
Description of the Servicing Agreement . . . . . . . . . . S-21
Description of the Securities . . . . . . . . . . . . . . . S-23 BEAR STEARNS ASSET BACKED SECURITIES, INC.
The Indenture . . . . . . . . . . . . . . . . . . . . . . . S-26 (DEPOSITOR)
The Trust Agreement . . . . . . . . . . . . . . . . . . . . S-29
Administration Agreement . . . . . . . . . . . . . . . . . S-31
The Indenture Trustee . . . . . . . . . . . . . . . . . . . S-31
The Owner Trustee . . . . . . . . . . . . . . . . . . . . . S-31
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . S-31
Certain Federal Income Tax Considerations . . . . . . . . . S-31
State Tax Considerations . . . . . . . . . . . . . . . . . S-32
ERISA Considerations . . . . . . . . . . . . . . . . . . . S-32
Legal Investment Considerations . . . . . . . . . . . . . . S-34
Underwriting . . . . . . . . . . . . . . . . . . . . . . . S-34
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . S-35
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . 3 PROSPECTUS SUPPLEMENT
Reports to Holders . . . . . . . . . . . . . . . . . . . . . 3 ________, 199__
Available Information . . . . . . . . . . . . . . . . . . . . 3
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . . . . . . . . . . 4
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 15
Description of the Securities . . . . . . . . . . . . . . . . 20
The Trust Funds . . . . . . . . . . . . . . . . . . . . . . . 24
Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . 31
Servicing of Loans . . . . . . . . . . . . . . . . . . . . . 33
The Agreements . . . . . . . . . . . . . . . . . . . . . . . 39
Certain Legal Aspects of the Loans . . . . . . . . . . . . . 47
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . 57
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 57
Certain Federal Income Tax Considerations . . . . . . . . . . 57
State Tax Considerations . . . . . . . . . . . . . . . . . . 77
FASIT Securities . . . . . . . . . . . . . . . . . . . . . . 77
ERISA Considerations . . . . . . . . . . . . . . . . . . . . 80
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . 84
Financial Information . . . . . . . . . . . . . . . . . . . . 84 BEAR, STEARNS & CO. INC.
Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Legal Investment . . . . . . . . . . . . . . . . . . . . . . 85
Plan of Distribution . . . . . . . . . . . . . . . . . . . . 85
Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . 86
================================================================= =============================================================
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
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 Certificates (the "Certificates") and the Asset-Backed Notes
(the "Notes" and, together with the Certificates, 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
Servicing 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 (collectively, the "Seller") composed of (a) Primary
Assets, which may include one or more pools of (i) closed-end and/or
revolving home equity loans (the "Mortgage Loans"), secured generally by
subordinate liens 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 generally by subordinate liens 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 into a
pre-funding account for a Series of Securities will not exceed twenty-five
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 GIVEN
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 TRUSTEES, 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" BEGINNING 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.
_____________, 1998
(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 upon the rate of payment (including prepayments) with
respect to the Loans or, in the case of Private Securities, Underlying Loans,
as applicable. In such a case, 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.
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; (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 assets included in 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 related Agreements
and will not receive such reports directly with respect to 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 (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), 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, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a Web site at http://www.sec.gov from which such Registration
Statement and exhibits may be obtained.
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 "Exchange Act"). The Depositor intends to cause each
Trust Fund to suspend filing such reports if and when such reports are no
longer required under the Exchange 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.
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 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 that 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.
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.
SECURITIES OFFERED Asset-Backed Certificates (the "Certificates")
and/or Asset-Backed Notes (the "Notes").
Certificates are issuable from time to time in
Series pursuant to a Pooling and Servicing Agreement
or Trust Agreement, as the case may be. 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 Subordinated 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., the
Depositor, the Servicer, any Trustee, the Seller or any
affiliate of the foregoing 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 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, allocated among the
Classes of such Series in the order and amounts and
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 (i) each Class of Notes is the date not later
than which principal of the Notes will be fully paid
and (ii) 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
that 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, to the extent described in the
related Prospectus Supplement, depend 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 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 related
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 (the "FHA") or
partially guaranteed by the Veterans Administration
(the "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 "Closed-End Loans") and/or revolving home equity loans
or certain balances therein (the "Revolving Credit Line Loans" and,
together with the Closed-End 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." The 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 the related 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."
The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series including, without
limitation and to the extent relevant: (i) the aggregate unpaid
Principal Balance of the Loans (or the aggregate unpaid Principal
Balance included in the Trust Fund for the related Series); (ii)
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; (iii)
the range and the average outstanding Principal Balance of the
Loans; (iv) 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; (v) 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; (vi) the percentage (by Principal
Balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (vii) any enhancement relating
to the Loans; (viii) the percentage (by Principal Balance as of the
Cut-off Date) of Loans that are secured by Mortgaged Properties or
Home Improvements, or that are unsecured; (ix) the geographic
distribution of any Mortgaged Properties securing the Loans; (x)
the use and type of each Property securing a Loan; (xi) the lien
priority of the Loans; (xii) the delinquency status and year of
origination of the Loans; (xiii) whether such Loans are Closed-End
Loans and/or Revolving Credit Line Loans; and (xiv) in the case of
Revolving Credit Line Loans, the general payment and credit line
features of such Loans and other pertinent features thereof.
(2) PRIVATE SECURITIES Primary Assets for a Series may consist,
in whole or in part, of Private
Securities, which include (i) pass-through
certificates representing beneficial
interests in loans of the type that would
otherwise be eligible to be Loans (the
"Underlying Loans") or (ii) collateralized
obligations secured by Underlying Loans.
Such pass-through certificates or
collateralized obligations will have
previously been (i) offered and
distributed to the public pursuant to an
effective registration statement or (ii)
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, that a period of three years has
elapsed since the later of the date such securities were acquired
from the related 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 related PS Trustee as registered owner
of such Private Securities.
The related Prospectus Supplement for a Series will specify (on an
approximate basis, as described above, and 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 characteristics of the Underlying Loans,
including (a) the payment features of such Underlying Loans (i.e.,
whether they are Closed-End Loans and/or Revolving Credit Line
Loans, 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 that 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 in respect of the Primary Assets for a Series will
be remitted directly to an account (each, a "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 applicable 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 (each, a "Distribution
Account") to be established for such Series, each in the manner and
at the times specified in the related Prospectus Supplement. All
amounts deposited into such Distribution Account(s) 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 in the manner
and at the times specified 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
of the Trust Fund for the related Series (the "Trustee"). 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 into the Pre-Funding
Account and may be used to purchase additional Primary Assets
during the period of time, not to exceed three 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 into a Pre-Funding Account for a
Series of Securities will not exceed twenty-five 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 related Closing Date, a portion of the proceeds of the sale
of the Securities of such Series will be deposited into the
Capitalized Interest Account and used to fund the excess, if any,
of (i) the sum of (a) the amount of interest accrued on the
Securities of such Series and (b) 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 (ii) 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 as
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,
insurance policy (each, a "Security Policy") or other form of
credit support (collectively, "Enhancement") in favor of the
applicable 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 (each, a "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.
A. SUBORDINATE SECURITIES
If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinated
Securities. The rights of the related Subordinated Securityholders
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 Agencies in one or more
reserve funds to be established in the name of the applicable
Trustee (each, a "Reserve Fund"), which will be used, as specified
in such Prospectus Supplement, by such 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 Agencies, 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 related Prospectus Supplement, the Depositor and
the applicable Trustee will enter into a guaranteed investment
contract or an investment agreement (the "Deposit Agreement")
pursuant to which all or a portion of the amounts held in the
Collection Account, the Distribution Account(s) or in any Reserve
Fund will be invested with the entity specified in such Prospectus
Supplement. Such 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 such 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 of or 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, will be reimbursable to the Servicer
from scheduled payments of principal and interest, late
collections, the proceeds of liquidation of the related Loans or
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 the related Holder in accordance
with such 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 methods regardless of such 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 related 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,
such 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 a REMIC "residual interest" (each, a "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 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
will be accounted for as original issue discount and, unless
otherwise specified in the related Prospectus Supplement, will be
reported by the applicable 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 Fund as a
partnership in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative
characterizations of such Trust Fund 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 or other retirement plan
or arrangement 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. Certain Classes
of Securities may not be transferred unless the applicable Trustee
and the Depositor are furnished with a letter of representation or
an opinion of counsel to the effect that such transfer will not
result in a violation of the prohibited transaction provisions of
ERISA and the Code and will not subject the applicable Trustee, the
Depositor or the Servicer to additional obligations. See
"Description of the Securities--General" and "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, as amended ("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 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 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."
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 (the "Underwriters") expect to make a secondary market
in the related Securities, but will have 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 or any failure to receive distributions on the Securities.
Further, unless otherwise stated in the related Prospectus Supplement, at the
times set forth in such Prospectus Supplement, certain Primary Assets and/or
any balance remaining in the Collection Account or Distribution Account(s)
immediately after making all payments due on the Securities of such Series
and other payments specified in Securities 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 under the related Indenture (the
"Indenture 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 source of funds from which 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."
Yield May Vary; Subordination. 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 on 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; (iii) the exercise by the party entitled thereto of any right of
optional termination; and (iv) in the case of Trust Funds comprised of
Revolving Credit Line Loans, any provisions in the related Agreement
described in the applicable Prospectus Supplement respecting any
non-amortization, early amortization or scheduled amortization period. 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."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior
Securities, to the extent described in the related Prospectus Supplement. As
a result of the foregoing, investors must be prepared to bear the risk that
they may be subject to delays in payment and may not recover their initial
investments in the Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related Cut-off Date
may not be fully amortizing over their terms to maturity, and thus will
require substantial principal payments (i.e., balloon payments) at their
stated maturity. Loans with balloon payments involve a greater degree of
risk because the ability of a borrower to make a balloon payment typically
will depend upon such borrower's ability either to timely refinance the
related Loan or to timely sell the related Property. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors, including the level of available mortgage rates at the time of sale
or refinancing, the borrower's equity in the related Property, the financial
condition of the borrower and tax laws. Losses on such Loans that are not
otherwise covered by the credit enhancement described in the applicable
Prospectus Supplement will be borne by the Holders of one or more Classes of
Securities of the related Series.
Property Values May Be Insufficient. If the Mortgage Loans 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.
Risks relating to Certain Geographic Regions where Mortgage Loans may be
Concentrated. Certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans
underlying certain Series of Securities may be concentrated in these regions,
and such concentration may present risk considerations in addition to those
generally present for similar mortgage-backed securities without such
concentration.
Book-Entry Registration. If Securities are issued in book-entry form,
such registration may reduce the liquidity of such Securities in the
secondary trading market, since investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates. Since
transactions in book-entry Securities can be effected only through the
Depository Trust Company ("DTC"), participating organizations, Financial
Intermediaries and certain banks, the ability of a Holder to pledge a
book-entry Security to persons or entities that do not participate in the DTC
system may be limited due to lack of a physical certificate representing such
Securities. Security Owners will not be recognized as Holders as such term
is used in the related Agreement, and Security Owners will be permitted to
exercise the rights of Holders only indirectly through DTC and its
Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC
and DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to
the accounts of Holders either directly or indirectly through Financial
Intermediaries.
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 assurance 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.
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.
Bankruptcy Risks. Federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to
realize upon its security. For example, in a proceeding under the federal
Bankruptcy Code, a lender may not foreclose on a mortgaged property without
the permission of the bankruptcy court. The rehabilitation plan proposed by
the related debtor may provide, if the mortgaged property is not the debtor's
principal residence and the court determines that the value of the mortgaged
property is less than the principal balance of the related mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged
property as of the date of the commencement of the bankruptcy, rendering the
lender a general unsecured creditor for the difference, and also may reduce
the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any
such proceedings under the federal Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
Loans underlying a Series of Securities and possible reductions in the
aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities. Debt
Securities that are Compound Interest Securities will be, and certain of the
Debt Securities may be, issued with original issue discount for federal
income tax purposes. A Holder of Debt Securities issued with original issue
discount will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to such income. Accrued but unpaid interest
on the Debt Securities that are Compound Interest Securities generally will
be treated as having original issue discount for this purpose. See "Certain
Federal Income Tax Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income
their pro rata share of the taxable income of the REMIC, regardless of the
amount or timing of their receipt of cash payments, as described in "Certain
Federal Income Tax Considerations." Accordingly, under certain
circumstances, Holders of Securities that constitute Residual Interest
Securities may have taxable income and tax liabilities arising from such
investment during a taxable year in excess of the cash received during such
period. Individual Holders of Residual Interest Securities may be limited in
their ability to deduct servicing fees and other expenses of the REMIC. In
addition, Residual Interest Securities are subject to certain restrictions on
transfer. Because of the special tax treatment of Residual Interest
Securities, the taxable income arising in a given year on a Residual Security
will not be equal to the taxable income associated with investment in a
corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Security may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Interest Security
should be aware that the IRS recently finalized regulations that provide that
a REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. Prospective purchasers of a REMIC Residual Interest
Security should consult their tax advisors regarding the possible application
of such regulations. See "Certain Federal Income Tax Considerations--
Taxation of Holders of Residual Interest Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any
Series may include Home Improvement Contracts that are not secured by an
interest in real estate or otherwise. The Trust Fund for any Series may also
include home equity contracts that were originated with Loan-to-Value Ratios
or Combined Loan-to-Value Ratios in excess of the value of the related
Mortgaged Property pledged as security therefor. Under such circumstances,
the Trust Fund for the related Series could be treated as a general unsecured
creditor as to any unsecured portion of any such Loan. In the event of a
default under a Loan that is unsecured in whole or in part, the related Trust
Fund will have recourse only against the borrower's assets generally for the
unsecured portion of the Loan, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating
to a borrower on any such Loan, the unsecured obligations of the borrower
with respect to such Loan may be discharged, even though the value of the
borrower's assets made available to the related Trust Fund as a general
unsecured creditor is insufficient to pay amounts due and owning under the
related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable rate
Loans may be underwritten on the basis of an assessment that Mortgagors will
have the ability to make payments in higher amounts after relatively short
periods of time. In some instances, Mortgagors' income may not be sufficient
to enable them to continue to make their loan payments as such payments
increase and thus the likelihood of default will increase.
Potential Liability For Environmental Conditions. Real property pledged
as security to a lender may be subject to certain environmental risks.
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. In certain circumstances, these laws and regulations impose
obligations on owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations
may result in fines and penalties.
In particular, under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs
of addressing hazardous substances on, in or beneath such property and
related costs. Such liability could exceed the value of the property and the
aggregate assets of the owner or operator. In addition, persons who
transport or dispose of hazardous substances, or arrange for the
transportation, disposal or treatment of hazardous substances, at off-site
locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage against such
property.
Under the laws of some states, and under CERCLA and the Federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable
as an "owner" or "operator" for costs of addressing releases or threatened
releases of hazardous substances at a property, or releases of petroleum from
an underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
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;
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience; and
(iv) for loans that were originated or 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 the loan documents 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.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans
with high interest rates or high up-front fees and charges. The provisions
of the Riegle Act apply on a mandatory basis to all mortgage loans originated
on or after October 1, 1995. These provisions can impose specified statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
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 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 Holders 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 applicable 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 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 Holders 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 Agencies 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 Agencies if in their
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 (each, an
"Indenture") between the related Trust Fund and the entity named in the
related Prospectus Supplement as Indenture 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 Subordinated
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
applicable 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
applicable Trustee specified in the Prospectus Supplement. 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 applicable Trustee, or a paying agent on behalf of such 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 deposits may be net of
certain amounts payable to the related Servicer and any other person
specified in such Prospectus Supplement. Such amounts thereafter will be
deposited into the Distribution Account(s) 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-outstanding 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 Agencies or a rate insured by means of a
surety bond, guaranteed investment contract, Deposit Agreement or other
arrangement satisfactory to the Rating Agencies. 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 per annum rate 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.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of a
Series 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 (the
"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 applicable 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 equal to or 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 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.
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
into the Collection Account or Distribution Account(s) 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.
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 "Closed-End Loans") and/or
revolving home equity loans or certain balances therein (the "Revolving
Credit Line Loans" and, together with the Closed-End Loans, the "Mortgage
Loans") secured by mortgages primarily on Single Family Properties that 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.
The full principal amount of a Closed-End 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. Unless otherwise described in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loans will
not exceed 360 months. Principal amounts on a Revolving Credit Line Loan may
be drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each Revolving Credit Line Loan from time to
time, but may be subject to a minimum periodic payment. Except to the extent
provided in the related Prospectus Supplement, the Trust Fund will not
include any amounts borrowed under a Revolving Credit Line Loan after the
Cut-off Date. As more fully described in the related Prospectus Supplement,
interest on each Revolving Credit Line Loan, excluding introductory rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily Principal Balance of such Loan. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End
Loan, a borrower may choose an interest only payment option and is obligated
to pay only the amount of interest that accrues on the loan during the
billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past
few years and the Depositor is not 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
Mortgage Loans may experience a higher rate of prepayment than traditional
first mortgage loans. On the other hand, because home equity loans such as
the Revolving Credit Line Loans generally are not fully amortizing, the
absence of voluntary borrower prepayments could cause rates of principal
payments lower than, or similar to, those of traditional fully-amortizing
first mortgages. The prepayment experience of the related Trust Fund may be
affected by a wide variety of factors, including general economic conditions,
prevailing interest rate levels, the availability of alternative financing
and homeowner mobility and the frequency and amount of any future draws on
any Revolving Credit Line Loans. Other factors that might be expected to
affect the prepayment rate of a pool of home equity mortgage loans or home
improvement contracts include the amounts of, and interest rates on, the
underlying first mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment
than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on home
equity loans for federal income tax purposes may further increase the rate of
prepayments of the Loans. Moreover, the enforcement of a "due-on-sale"
provision (as described below) will have the same effect as a prepayment of
the related Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale
Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire Principal Balance plus accrued interest
and the fees and charges thereon. It is possible that borrowers may fail to
make the required periodic payments. In addition, collections on the
Mortgage Loans may vary due to seasonal purchasing and the payment habits of
borrowers.
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 that 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, newsstands, 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 Loans secured by 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 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 in 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 subordinated 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.
Additional Information. The selection criteria that 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 (the "FHA") or partially guaranteed by the
Veterans Administration (the "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 or
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 (the "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances, the spouse of a 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 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 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 or Home Improvements or
that 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;
(l) the delinquency status and year of origination of the Loans; (m) whether
such Loans are Closed-End Loans and/or Revolving Credit Line Loans; and (n)
in the case of Revolving Credit Line Loans, the general payments and credit
line terms of such Loans and other pertinent features thereof. 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 that 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 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, cash collateral accounts, Security 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 Closed-End Loans and/or Revolving
Credit Line Loans, 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, Security Policies 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 (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 into the applicable Distribution Account, which
will also be established by the applicable Trustee for each such Series of
Securities, for distribution to the related Holders. Unless otherwise
specified in the related Prospectus Supplement, the applicable Trustee will
invest the funds in the Collection Account and the Distribution Account(s) 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 into the Distribution Account(s) or otherwise
distributed and, in the case of funds in the Distribution Account(s), 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 Agencies.
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 into 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 into 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.
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 a Security Policy, issue
Subordinated 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
Agencies. The Enhancement will support the payment of principal of 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.
SUBORDINATED SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinated Securities. The
rights of the related Subordinated Securityholders 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 (the "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 expenses will not affect the total amount in respect of 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
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 the 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 applicable Trustee as part of the Trust Fund for such
Series or for the benefit of any Enhancer with respect to such Series (each,
a "Reserve Fund") cash, a letter or letters of credit, cash collateral
accounts, Eligible Investments, or other instruments meeting the criteria of
the Rating Agencies 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
applicable 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 into a Reserve Fund will be invested by the applicable
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 Agencies 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
applicable 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.
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 (each, an "Escrow Account") with respect to Loans in which payments
by obligors to pay taxes, assessments, mortgage and hazard Insurance Policy
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 Federal Deposit Insurance
Corporation or that 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 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 in respect of principal, including prepayments,
on such Primary Assets;
(ii) All payments in respect 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;
(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, net of related liquidation expenses
("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
Policy 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 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; provided, that 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
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to 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 Insurance Proceeds;
(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 into the Collection Account and not previously withheld, and
to the extent that Liquidation Proceeds after such reimbursement exceed
the 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 applicable Trustee of such Series
for deposit into the related 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
(viii) to clear and terminate the Collection Account pursuant to
the related Agreement.
In addition, if the Servicer deposits into 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 that represent late recoveries of principal or interest,
Insurance Proceeds or Liquidation Proceeds respecting which any such Advance
was made. If an Advance is made and subsequently determined to be
nonrecoverable from late collections, Insurance Proceeds or Liquidation
Proceeds from the related Loan, the Servicer may be entitled to reimbursement
from other funds in the Collection Account or Distribution Account(s), 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 any improvements on the 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 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.
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 Insurance Policies
(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 into 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 that 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 into 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 Insurance Proceeds. 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 change
in the terms 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 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 each applicable Trustee and independent accountants, payment of
Security Policy and Insurance Policy premiums, if applicable, 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 applicable Trustee for deposit into the related 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 Principal Balance
of and unpaid interest on the related Loan that 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 Insurance Proceeds, 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 applicable 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 applicable
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.
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 a 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, that 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 that
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 that is not incidental to its servicing responsibilities under
such Agreement that, in its opinion, may involve it in any expense or
liability. The Servicer may, in its discretion, undertake any such action
that 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.
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 Contracts. 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 Holders 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 Holders 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 Loan 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.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise
specified in the related Prospectus Supplement, the PS 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, 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 PS 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 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 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) a Principal Balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of the 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 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 will be 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 applicable 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 applicable Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to such Trustee reasonable indemnity, and such Trustee for 60 days
has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The applicable 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 amount 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 amount 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 applicable 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 each applicable 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 applicable Trustee. The applicable Trustee will forward
such reports only to the entity or its nominee that is the registered holder
of the global certificate that 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 policies 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(s) to enable the applicable
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 applicable Trustee for such Series, or to the Servicer
and such 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 that
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 applicable Trustee, or to the Servicer and such 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 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 applicable 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 applicable Trustee
or exercising any trust or power conferred upon such Trustee. However, the
applicable 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
such Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by such Trustee therein or thereby. The
applicable Trustee may decline to follow any such direction if such 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 non-assenting 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 that
continues for a period of sixty (60) days after notice thereof is given in
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 Indenture 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
Indenture 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 Indenture 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 of 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 Indenture 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 Indenture Trustee obtains the consent of the Holders of
662/3% of the then-aggregate outstanding amount of the Notes of such Series.
In the event that the Indenture 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 Indenture 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 Indenture 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 that is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of such Series, unless
such Holders offered to the Indenture Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities that 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
Indenture Trustee or exercising any trust or power conferred on the Indenture
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.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee or Indenture Trustee, as the case may be,
for each Series of Securities will be set forth in the related Prospectus
Supplement. Entities 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,
each Trustee will have the power to appoint co-trustees or separate trustees.
In the event of such appointment, all rights, powers, duties and obligations
conferred or imposed upon the applicable Trustee by the Agreement relating to
such Series will be conferred or imposed upon such Trustee and each such
separate trustee or co-trustee jointly, or, in any jurisdiction in which such
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
applicable Trustee. The applicable Trustee may also appoint agents to
perform any of the responsibilities of such Trustee, which agents will have
any or all of the rights, powers, duties and obligations of such Trustee
conferred on them by such appointment; provided, that the applicable Trustee
will continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF TRUSTEES
No Trustee will make any representations as to the validity or
sufficiency of the related 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 applicable Trustee will be required to perform
only those duties specifically required of it under such Agreement. Upon
receipt of the various certificates, statements, reports or other instruments
required to be furnished to it, the applicable Trustee will be required to
examine them to determine whether they are in the form required by the
related Agreement. However, such 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 related Agreement.
Each Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no Trustee will 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 related
Holders in an Event of Default. No Trustee will be required to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related 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 TRUSTEES
Each 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 such 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. Each Trustee
may also be removed at any time (i) if such Trustee ceases to be eligible to
continue as such under the related Agreement, (ii) if such 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 applicable Trustee and to the Depositor. Any resignation or
removal of a 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 applicable 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 applicable Trustee or the 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 any Trustee is obligated to maintain or improve such rating),
or (vi) to comply 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 delivered to the applicable Trustee.
Any such amendment except pursuant to clause (vi) above shall be deemed not
to adversely affect in any material respect the interests of any Holder if
the applicable 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, each Agreement for each Series may also be amended by
the applicable Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less
than 662/3% 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, 662/3% 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 such Holders propose to transmit, the applicable Trustee will
afford such Holders access during business hours to the most recent list of
Holders of that Series held by such 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 under the circumstances
described in the related 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 Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture 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 Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America that, 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 of and interest on, if any, their Notes until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that 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 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
that 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 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 that 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.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. These include laws and regulations governing air pollutant
emissions, hazardous and toxic substances, impacts to wetlands, leaks from
underground storage tanks and the management, removal and disposal of lead-
and asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with
such laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator.
In addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage against such
property. Under CERCLA, such a lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act (the "SWDA") provides similar
protection to secured creditors in connection with liability for releases of
petroleum from certain underground storage tanks. However, if a lender
"participates in the management" of the facility in question or is found not
to have held its interest primarily to protect a security interest, the
lender may forfeit its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(the "EPA") in April 1992 attempted to clarify the activities in which
lenders could engage both prior to and subsequent to foreclosure of a
security interest without forfeiting the secured creditor exemption under
CERCLA. The rule was struck down in 1994 by the United States Court of
Appeals for the District of Columbia Circuit in Kelley ex rel State of
Michigan v. Environmental Protection Agency, 15 F.3d 1100 (D.C Cir. 1994),
reh'g denied, 25 F.3d 1088, cert. denied sub nom. Am. Bankers Ass'n v.
Kelley, 115 S.Ct. 900 (1995). Another EPA regulation promulgated in 1995
clarifies the activities in which lenders may engage without forfeiting the
secured creditor exemption under the underground storage tank provisions of
the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the
CERCLA and SWDA exemptions, both while the borrower is still in possession of
the secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still
in possession of the facility encumbered by the security interest, the lender
(i) exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the facility or
(ii) exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility for
(a) overall management of the facility encompassing daily decision-making
with respect to environmental compliance or (b) overall or substantially all
of the operational functions (as distinguished from financial or
administrative functions) of the facility other than the function of
environmental compliance. The amendments also specify certain activities
that are not considered to be "participation in management," including
monitoring or enforcing the terms of the extension of credit or security
interest, inspecting the facility, and requiring a lawful means of addressing
the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in
connection with the Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs
associated with environmental cleanup and related actions may be substantial.
Moreover, some state laws imposing liability for addressing hazardous
substances do not contain exemptions from liability for lenders. Whether the
costs of addressing a release or threatened release at a property pledged as
collateral for one of the Loans would be imposed on the Trust Fund, and thus
occasion a loss to the Holders, therefore depends on the specific factual and
legal circumstances at issue.
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.
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 that 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 that 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 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 mortgage 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 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.
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 Title V. Title 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 in effect
in the applicable jurisdiction (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 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 that is the seller of goods that 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 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 that 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 that 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.
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "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 Policy 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 any 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.
THE DEPOSITOR
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 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 is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel
to the Depositor (in such capacity, "Tax Counsel"). 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 summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. 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. Prospective investors may
wish to consult their own tax advisers concerning the federal, state, local
and any other tax consequences as relates specifically to such investors in
connection with the purchase, ownership and disposition of the Securities.
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 (a "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; or (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization
Investment Trust ("FASIT") under the Code. The Prospectus Supplement for
each Series of Securities will specify how the 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.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose
income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States persons prior to such date that elect to continue to be treated
as United States persons shall be considered U.S. Persons as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("Regular Interest Securities") or represent interests in a
grantor trust, Tax Counsel is of the opinion that: (i) Securities held by a
domestic building and loan association will constitute "loans... secured by
an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v); and (ii) Securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on 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).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
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."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at
a discount 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 and amended on June 11, 1996 (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. In the
opinion of Tax Counsel, 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, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below); provided, that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period
that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Debt Security.
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.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the calculation
of OID on instruments having contingent interest payments. The Contingent
Payment Regulations, represent the only guidance regarding the views of the
IRS with respect to contingent interest instruments and specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the
applicable Trustee intends to base its computation on Code Section 1272(a)(6)
and the OID Regulations as described in this Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6), there can
be no assurance that such methodology represents the correct manner of
calculating OID.
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 that 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 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 IRS 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 otherwise provided in the
related Prospectus Supplement, the applicable 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. In the opinion of Tax Counsel,
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 Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Trustee intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and
rate of accrual of such OID should be calculated by treating the Interest
Weighted Security as a Compound Interest Security. However, in the case of
Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the Internal Revenue Service could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium equal to
the excess of the price paid by such Holder for such Security over its stated
principal amount, if any. Under this approach, a Holder would be entitled to
amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all taxable debt instruments held by such Holder,
as described below. Alternatively, the IRS could assert that an Interest
Weighted Security should be taxable under the rules governing bonds issued
with contingent payments. Such treatment may be more likely in the case of
Interest Weighted Securities that are Stripped Securities as described below.
See "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i)
the yield to maturity of such Debt Securities and (ii) in the case of
Pay-Through Securities, the present value of all payments remaining to be
made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security
is uncertain, Holders of variable rate Debt Securities should consult their
own tax advisers regarding the appropriate treatment of such Securities for
federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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 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
IRS. 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 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, in the
opinion of Tax Counsel (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 securities, "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)(4)(A), 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, in the opinion of Tax Counsel, 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 that is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise specified in the
related Prospectus Supplement, the expenses of the REMIC will be allocated to
Holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, 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.
Calculation of REMIC Income. In the opinion of Tax Counsel, 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). That 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 Securities 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 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
In the opinion of Tax Counsel, the Holder of a Certificate 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.
In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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 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. In the opinion of Tax Counsel, 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 Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their
excess inclusion income from Residual Interest Securities that have
"significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Interest Securities continuously held by a thrift institution since
November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual Holder. First, alternative
minimum taxable income for such residual Holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual Holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
Holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
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 Day 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 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), 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.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual 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 1-1399 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 acting 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 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 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 REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
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.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of 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.
In the opinion of Tax Counsel, 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 applicable Trustee and the
Servicer and similar fees (collectively, the "Servicing Fee")), 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 applicable 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 deductible 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. In the opinion of Tax
Counsel, 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 related
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 Certificate, 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.
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 (the "excess
servicing fee") 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's
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 that 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.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority, to
report income to Holders as OID, in the manner described above for Interest
Weighted Securities.
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 non-Interest
Weighted Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Proposed Regulations; or (iii) each
Interest Weighted Stripped Security 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.
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. 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)(4)(A) 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" within 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, in the opinion of Tax Counsel, 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 such gain will generally be
capital gain or loss, assuming that the Security is held as a capital asset
and will generally be long-term capital gain or loss if the holding period of
the security is one year or more. The Taxpayer Relief Act of 1997 (the
"Act") reduces the maximum rates on long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as
of the date of disposition (and would further reduce the maximum rates on
such gains in the year 2001 and thereafter for certain individual taxpayers
who meet specified conditions). The capital gains rate for capital assets
held by individual taxpayers for more than twelve months but less than
eighteen months was not changed by the Act. The Act does not change the
capital gain rates for corporations. Prospective investors should consult
their own tax advisors concerning these tax law changes.
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.
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 REMIC Residual 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 applicable Trustee with its taxpayer identification number (the
"TIN"); (ii) furnishes the applicable 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 applicable 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 applicable 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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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 nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), in the opinion of Tax Counsel, 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.
Interest and OID of Holders who are foreign persons 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 foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders 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 that 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 FUND AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the 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, in the opinion of Tax Counsel, 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. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion 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, in the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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 accrued interest
and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (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 Fund or
the Seller (including a Holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust Fund or the
Seller is a "related person" within the meaning of the Code and (ii) provides
the 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.
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.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 1998,
subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of 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 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.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer 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. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, 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.
In the opinion of Tax Counsel, 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, in the opinion
of Tax Counsel, 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, in the opinion of Tax Counsel,
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.
In the opinion of Tax Counsel, 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.
In the opinion of Tax Counsel, 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 Fund 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, in the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. Pursuant to
final Treasury regulations issued May 9, 1997 under Section 708 of the Code,
if such a termination occurs, the Trust Fund (the "old partnership") would be
deemed to contribute its assets to a new partnership (the "new partnership")
in exchange for interests in the new partnership. Such interests would be
deemed distributed to the partners of the old partnership in liquidation
thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
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.
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 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-l 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 (a) the name, address and identification
number of such person, (b) 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
(c) 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
non-U.S. 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 foreign
Certificateholders 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
foreign Holders that are taxable as corporations and 39.6% for all other
foreign Holders. 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 foreign Holder 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 foreign
Holder 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 foreign Holder 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 will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign Holder 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. The New Regulations described herein make
certain modifications to the backup withholding and information reporting
rules. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations 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.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities
("FASIT Securities"). Although the FASIT provisions of the Code became
effective on September 1, 1997, no Treasury regulations or other
administrative guidance has been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of Holders of FASIT Securities. Investors also
should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to Holders of FASIT
Securities. With respect to each Series of FASIT Securities, the related
Prospectus Supplement will provide a detailed discussion regarding the
federal income tax consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for such Series, and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (a) the composition of the FASIT's assets and
(b) the nature of the Holders' interest in the FASIT are met on a continuing
basis and (iii) the Trust Fund is not a regulated company as defined in
Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the Closing Date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the Holder of the FASIT's ownership interest or by any person
related to such Holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more Classes of regular interests or (ii) a single Class of ownership
interest that is held by a fully taxable domestic corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its Holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5% and (vi) if it
pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Federal Income Tax Considerations--Taxation of Debt Securities--
Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security
consists of a specified portion of the interest payments on permitted assets
and that portion does not vary over the life of the Security, the Security
also will qualify as a High-Yield Interest. A High-Yield Interest may be
held only by domestic corporations that are fully subject to corporate income
tax ("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, Holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Considerations--FASIT Securities--Tax Treatment of FASIT Regular Securities--
Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may
be lost for that year and thereafter. If FASIT status is lost, the treatment
of the former FASIT and the interests therein for federal income tax purposes
is uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxed as a corporation, or as a partnership. The FASIT
Regular Securities could be treated as debt instruments for federal income
tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of Holders of
REMIC Regular Securities, Holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Holder and a principal payment on such Security will be treated
as a return of capital to the extent that the Holder's basis is allocable to
that payment. FASIT Regular Securities issued with original issue discount
or acquired with market discount or premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Taxation
of Debt Securities," "--Market Discount," and "--Premium" above. High-Yield
Securities may be held only by fully taxable domestic corporations, other
FASITs, and certain securities dealers. Holders of High-Yield Securities are
subject to limitations on their ability to use current losses or net
operating loss carryforwards or carrybacks to offset any income derived from
those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--
Sale or Exchange." In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and Delinquencies of the
underlying assets, the Holder of such Security should be allowed to deduct
the loss sustained (or alternatively be able to report a lesser amount of
income). See "Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest
on such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular
Securities held by a Thrift Institution taxed as a "domestic building and
loan association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Considerations--Taxation of Debt Securities--Status as Real
Property Loans." In addition, FASIT Regular Securities held by a financial
institution to which Section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of Section 582(c)(1) of the Code.
FASIT Securities will not qualify as "Government Securities" for either REIT
or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified Holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the Holder of the High-Yield
Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as
High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, Holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
Holders of High-Yield Interests. See "Certain Federal Income Tax
Considerations--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
Holder of the related FASIT Ownership Security was required to be
marked-to-market under Code section 475 by such Holder, then section 475 will
continue to apply to such securities, except that the amount realized under
the mark-to-market rules will be a greater of the securities' value under
present law or the securities' value after applying special valuation rules
contained in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an
established securities market be determined by calculating the present value
of the reasonably expected payments under the instrument using a discount
rate of 120% of the applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders
of REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes
of reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO HOLDERS
AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF
THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF
THE SECURITIES.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses, the related
Prospectus Supplement will contain information concerning considerations
relating to ERISA and the Code that are applicable to such Securities and
such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may
be invested in Securities without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan that is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan acquires an "equity" interest could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial
equity features." If the Trust Fund issues Notes that are not treated as
equity interests in the Trust Fund for purposes of the Plan Asset Regulation,
a Plan's investment in such Notes would not cause the assets of the Trust to
be deemed Plan assets. However, the Seller, the Servicer, the Special
Servicer, the Backup Servicer, the Indenture Trustee, the Owner Trustee and
the Depositor may be the sponsor of or investment advisor with respect to one
or more Plans. Because such parties may receive certain benefits in
connection with the sale of the Notes, the purchase of Notes using Plan
assets over which any such parties (or any affiliates thereof) has investment
authority might be deemed to be a violation of the prohibited transaction
rules of ERISA and the Code for which no exemption may be available.
Accordingly, Notes may not be purchased using the assets of any Plan if the
Seller, the Servicer, the Special Servicer, the Indenture Trustee, the Owner
Trustee, the Depositor or any of their affiliates (a) has investment or
administrative discretion with respect to such Plan assets; (b) has authority
or responsibility to give, or regularly gives, investment advice with respect
to such Plan assets for a fee and pursuant to an agreement of understanding
that such advice (i) will serve as a primary basis for investment decisions
with respect to such Plan assets and (ii) will be based on the particular
investment needs for such Plan; or (c) is an employer maintaining or
contributing to such Plan.
In addition, certain affiliates of the Seller might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In
either case, the acquisition or holding of Notes by or on behalf of such a
Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as: Prohibited Transaction Class Exemption ("PTCE") 84-14,
which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE
91-38, which exempts certain transactions involving bank collective
investment funds; PTCE 95-60, which exempts certain transactions involving
insurance company general accounts; or PTCE 96-23, which exempts certain
transactions effected on behalf of a Plan by certain "in-house asset
managers." Each prospective purchaser or transferee of a Note that is a Plan
or a person acting on behalf or investing the assets of a Plan shall be
required to represent (or, with respect to any transfer of a beneficial
interest in a Global Note, shall be deemed to represent) to the Indenture
Trustee and the Note Registrar that the relevant conditions for exemptive
relief under at least one of the foregoing exemptions have been satisfied.
However, the regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired
by the investing Plan is a publicly-offered security. A publicly-offered
security, as defined in the Labor Reg. Section 2510.3-101, is a security that
is widely held, freely transferable and registered under the Exchange Act.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which
amended Prohibited Transaction Class Exemption 81-7, the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage
pool pass-through certificates representing an interest in such mortgage
pools by Plans. If the general conditions (discussed below) of PTCE 83-1 are
satisfied, investments by a Plan in Securities that represent interests in a
Pool consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTCE
83-1 does not provide an exemption for transactions involving Subordinated
Securities. Accordingly, unless otherwise provided in the related Prospectus
Supplement, no transfer of a Subordinated Security or a Security that is not
a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single Class of
Securities; and (ii) Securities issued in a Series in which there is only one
Class of those particular Trust Securities; provided, that the Securities in
the case of clause (i), or the Securities in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than
0%) of future principal payments on the Loans. It is not clear whether a
Class of Securities that evidences the beneficial ownership in a Trust Fund
divided into Loan groups, beneficial ownership of a specified percentage of
interest payments only or principal payments only, or a notional amount of
either principal or interest payments, or a Class of Securities entitled to
receive payments of interest and principal on the Loans only after payments
to other Classes or after the occurrence of certain specified events would be
a "mortgage pass-through certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee
who is not an affiliate of the pool sponsor; and (iii) a limitation on the
amount of the payment retained by the pool sponsor, together with other funds
inuring to its benefit, to not more than adequate consideration for selling
the mortgage loans plus reasonable compensation for services provided by the
pool sponsor to the Pool. The Depositor believes that the first general
condition referred to above will be satisfied with respect to the Securities
in a Series issued without a subordination feature, or the unsubordinated
Securities only in a Series issued with a subordination feature; provided,
that the subordination and Reserve Account, subordination by shifting of
interests, the pool insurance or other form of credit enhancement described
herein (such subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to
above) with respect to a Series of Securities is maintained in an amount not
less than the greater of one percent of the aggregate Principal Balance of
the Loans or the Principal Balance of the largest Loan. See "Description of
the Securities" herein. In the absence of a ruling that the system of
insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTCE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence 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.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to
certain sales and servicing of "certificates" that are obligations of a
"trust" with respect to which Bear, Stearns & Co. Inc. is the underwriter,
manager or co-manager of an underwriting syndicate. The Underwriter
Exemption provides relief generally similar to that provided by PTCE 83-1,
but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate," which includes an interest that
entitles the Holder to pass-through payments of principal, interest and/or
other payments. The Underwriter Exemption contains an expanded definition of
"trust," which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust," however, does not include any
investment pool unless, inter alia, (i) the investment pool consists only of
assets of the type that have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemption and
(iii) certificates in such other investment pools have been rated in one of
the three highest generic rating categories of the four credit rating
agencies noted below. Generally, the Underwriter Exemption holds that the
acquisition of the certificates by a Plan must be on terms (including the
price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires
that certificates acquired by a Plan have received a rating at the time of
their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or
Fitch IBCA, Inc. The Underwriter Exemption specifies that the pool trustee
must not be an affiliate of the pool sponsor, nor an affiliate of the
Underwriter, the pool servicer, any obligor with respect to mortgage loans
included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for
trusts issuing pass-through certificates. The amendment generally allows
mortgage loans or other secured receivables (the "Obligations") supporting
payments to certificateholders, and having a value equal to no more than
twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Pre-Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from an
Exemption Rating Agency upon termination of the Pre-Funding Period than
the rating that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in
the trust at the end of the Pre-Funding Period must not be more than 100
basis points lower than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Exemption Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to the
trust as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding may
be invested only in certain permitted investments ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust
which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTCE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. 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 MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, One World Trade Center, New York,
New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund assets and any credit enhancement with respect to
the related Class and will reflect such Rating Agency's assessment solely of
the likelihood that the related Holders will receive payments to which such
Holders are entitled under the related Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Loans will be made, the degree to which the rate of such prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the Series of Securities. 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. Such
rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agencies in the future if in their judgment
circumstances so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn because of, among other reasons, an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such Class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the Principal Balances of the Loans in a particular
Trust Fund and any secondary financing on the related Properties become equal
to or greater than the value of such Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In additional, adverse economic conditions
(which may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal of and interest on
the Loans and, accordingly, the rates of delinquencies, foreclosures and
losses with respect to any Trust Fund. To the extent that such losses are
not covered by credit enhancement, such losses will be borne, at least in
part, by the Holders of one or more Classes of the Securities of the related
Series.
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.
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 complete definition of such terms.
"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.
"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.
"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 applicable Trustee is
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.
"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.
"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.
"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
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 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 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, receives proprietary leases or occupancy agreements that confer
exclusive rights to occupy specific units and that is described in Section
216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Deferred Interest" means the excess of the interest accrued on the
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.
"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 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.
"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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event of default under and as specified in
the related Agreement.
"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.
"Holder" means the person or entity in whose name a Security is
registered.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies maintained with respect to the 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 that is identified as such in
the related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note, as the context may require.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a Mortgage.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"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.
"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.
"Primary Assets" means the Private Securities and/or Loans, as the case
may be, that 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.
"Regular Interest" means a regular interest in a REMIC.
"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.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in
lieu of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount
or percentage specified in the related Prospectus Supplement that 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.
"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 Subordinated Securityholders, 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.
"Subordinated Securityholder" means a Holder of a Subordinated 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
allocated losses and shortfalls 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, held, with respect to a Series of Certificates, 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 Indenture Trustee as security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts
in the Distribution Account(s), 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.
"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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Securities, other than underwriting
discounts and commissions:
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $295.00
Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and Engraving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blue Sky Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
</TABLE>
All amounts, except the SEC Registration Fee, are estimates of expenses
incurred or to be incurred.
To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article TWELFTH of the Certificate of Incorporation of the Issuer
provides for the indemnification of any person who is or was an officer or
director of the Issuer with respect to actions taken or omitted by such
person in any capacity in which such person serves or served the Issuer, to
the full extent authorized or permitted by Section 145 of the Delaware
General Corporation Law.
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
NONE.
(b) EXHIBITS:
1.1 --Form of Underwriting Agreement.
4.1 --Form of Indenture.
4.2 --Form of Pooling and Servicing Agreement.
4.3 --Form of Purchase Agreement.
4.4 --Form of Trust Agreement.
5.1 --Opinion of Brown & Wood LLP with respect to
the securities being registered.
8.1 --Opinion of Brown & Wood LLP with respect to
tax matters (included as part of Exhibit
5.1).
10.1 --Form of Sale and Servicing Agreement.
23.1 --Consent of Brown & Wood LLP (included as
part of Exhibit 5.1).
24.1 --Powers of Attorney of Directors and
Officers of Issuer (included on signature
page).
25.1 --Statement of Eligibility and Qualification of Trustee.
To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to part of this
registration statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
26th day of March, 1998.
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
By: /s/Patricia A. Jehle
-----------------------------------
- -----------------
Patricia A. Jehle
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Patricia A. Jehle and William J.
Montgoris, or any of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Patricia A. Jehle President, Chief March 26, 1998
- ------------------------------
Patricia A. Jehle Executive Officer and
Director (Principal
Executive Officer)
/s/William J. Montgoris Executive Vice President March 26, 1998
- ------------------------------
William J. Montgoris and Treasurer (Principal
Financial and Accounting
Officer)
/s/Warren J. Spector Director March 26, 1998
- ------------------------------
Warren J. Spector
/s/Juliana C. Johnson Director March 26, 1998
- ------------------------------
Juliana C. Johnson
