<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-43278
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 6, 2000
--------------------------------------------------------------------------------
$275,000,000
ABFS MORTGAGE LOAN TRUST 2000-4
MORTGAGE-BACKED NOTES, SERIES 2000-4
$275,000,000 7.05% CLASS A NOTES
[GRAPHIC OMITTED](R)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
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--------------------------- THE TRUST FUND --
| YOU SHOULD READ THE |
| SECTION ENTITLED "RISK | o The trust fund consists primarily of a pool
| FACTORS" STARTING ON PAGE | of fixed-rate business and consumer purpose
| S-3 OF THIS PROSPECTUS | home equity loans secured by first- or
| SUPPLEMENT AND PAGE 3 OF | second-lien mortgages on residential real
| THE ACCOMPANYING | properties and to a limited extent, loans
| PROSPECTUS AND CONSIDER | secured by commercial real properties.
| THESE FACTORS BEFORE |
| MAKING A DECISION TO | THE NOTES --
| INVEST IN THE NOTES. |
| | o The notes will be secured primarily by a
| The notes represent | pledge of the pool of mortgage loans.
| non-recourse obligations |
| of the trust only and are | CREDIT ENHANCEMENT --
| not interests in or |
| obligations of any other | o The notes will be unconditionally and
| person. | irrevocably guaranteed as to the timely
| | payment of interest and as to specified
| Neither the notes nor the | payments of principal pursuant to the terms
| underlying mortgage loans | of a financial guaranty insurance policy to
| will be insured or | be issued by
| guaranteed by any |
| governmental agency or | [AMBAC GRAPHIC OMITTED]
| instrumentality. |
--------------------------- o Excess interest will be used in the early
years of the transaction to create and build
over-collateralization.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The notes offered by this prospectus supplement will be purchased by
Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated and offered from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the issuer from the
sale of the notes are anticipated to be approximately $274,289,098 before the
deduction of expenses payable by the issuer, estimated to be approximately
$500,000. The notes will be available for delivery to investors in book-entry
form through the facilities of The Depository Trust Company, Clearstream
Luxembourg and the Euroclear System on or about December 21, 2000.
BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 6, 2000
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that provide more detail in progression: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes. IF THE ACCOMPANYING PROSPECTUS CONTEMPLATES MULTIPLE
OPTIONS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AS TO
THE APPLICABLE OPTION.
We cannot sell the notes to you unless you have received both this
prospectus supplement and the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
S-ii
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY......................................................................S-1
RISK FACTORS.................................................................S-3
TRANSACTION OVERVIEW.........................................................S-5
Parties...................................................................S-5
The Transaction...........................................................S-6
THE MORTGAGE LOAN POOL.......................................................S-7
THE ORIGINATORS, THE SELLER AND THE SERVICER................................S-14
The Originators..........................................................S-14
Marketing Strategy.......................................................S-18
Underwriting Procedures and Practices....................................S-19
The Servicer.............................................................S-21
Delinquency and Loan Loss Experience.....................................S-22
THE OWNER TRUSTEE...........................................................S-24
THE INDENTURE TRUSTEE AND THE COLLATERAL AGENT..............................S-24
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES.........................S-25
Book-Entry Registration..................................................S-25
Definitive Notes.........................................................S-29
Assignment and Pledge of the Mortgage Loans..............................S-29
Delivery of Mortgage Loan Documents......................................S-30
Representations and Warranties of the Seller.............................S-31
Payments on the Mortgage Loans...........................................S-33
Over-collateralization Provisions........................................S-35
Flow of Funds............................................................S-36
Indenture Events of Default..............................................S-36
Reports to Noteholders...................................................S-37
Amendment................................................................S-38
SERVICING OF THE MORTGAGE LOANS.............................................S-38
Servicing Fees and Other Compensation and Payment of Expenses............S-38
Periodic Advances and Servicer Advances..................................S-39
Prepayment Interest Shortfalls...........................................S-39
Relief Act Shortfalls....................................................S-40
Optional Purchase of Delinquent Mortgage Loans...........................S-40
Servicer Reports.........................................................S-40
Collection and Other Servicing Procedures................................S-41
Hazard Insurance.........................................................S-41
Realization Upon Defaulted Mortgage Loans................................S-42
Removal and Resignation of the Servicer..................................S-42
Optional Clean-up Call on the Notes......................................S-44
Termination; Purchase of Mortgage Loans..................................S-44
THE POLICY..................................................................S-44
Drawings Under the Policy................................................S-45
THE NOTE INSURER............................................................S-45
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-47
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...................................S-50
Treatment of the Notes...................................................S-50
ERISA CONSIDERATIONS........................................................S-51
LEGAL INVESTMENT............................................................S-52
PLAN OF DISTRIBUTION........................................................S-52
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................S-53
ADDITIONAL INFORMATION......................................................S-54
EXPERTS.....................................................................S-54
LEGAL MATTERS...............................................................S-54
RATINGS.....................................................................S-54
GLOSSARY....................................................................S-55
PROSPECTUS
RISK FACTORS...................................................................3
DESCRIPTION OF THE SECURITIES..................................................8
THE TRUST FUNDS...............................................................13
ENHANCEMENT...................................................................22
SERVICING OF LOANS............................................................25
THE AGREEMENTS................................................................32
CERTAIN LEGAL ASPECTS OF THE LOANS............................................42
THE DEPOSITOR.................................................................53
USE OF PROCEEDS...............................................................53
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.....................................53
STATE TAX CONSIDERATIONS......................................................76
FASIT SECURITIES..............................................................76
ERISA CONSIDERATIONS..........................................................80
LEGAL MATTERS.................................................................86
FINANCIAL INFORMATION.........................................................86
AVAILABLE INFORMATION.........................................................86
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................86
RATING........................................................................87
LEGAL INVESTMENT..............................................................88
PLAN OF DISTRIBUTION..........................................................88
INDEX OF DEFINED TERMS........................................................89
S-iii
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<PAGE>
SUMMARY
This summary highlights selected information from this prospectus supplement and
does not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus supplement and the
accompanying prospectus carefully to understand all of the terms of the offering
of the notes.
---------------------------------------------------------
THE NOTES AND THE TRUST CERTIFICATES
The ABFS Mortgage Loan Trust 2000-4 will issue one class of its mortgage-backed
notes, series 2000-4: the class A notes. The class A notes will be secured by
the assets of the trust, which consist primarily of the mortgage loans. The
notes are being offered to you by this prospectus supplement.
The trust will also issue one class of trust certificates, representing the
entire beneficial ownership interest in the trust. The holder of a trust
certificate is entitled to receive specified payments consisting of excess
interest from the mortgage loans, but only after all other payments have been
made in respect of the notes. The trust certificates are not offered by this
prospectus supplement.
PAYMENTS
Payments on the notes will be on the 15th day of each month, or, if such 15th
day is not a business day, on the next business day, beginning on January 16,
2001, to the holders of record on the preceding record date.
The record date for the notes will be the last business day of the month
preceding the related payment date, or, in the case of the January 16, 2001
payment date, the closing date.
PAYMENTS OF INTEREST
On each payment date, the notes are entitled to receive current interest.
o Current Interest. The current interest for a payment date is the interest
which accrues on the notes at the note rate on the outstanding principal
balance of the notes during the accrual period.
o Accrual Period. The accrual period for the notes is the calendar month
preceding the payment date.
All computations of interest accrued on the notes will be made on the basis of a
360-day year consisting of twelve 30-day months.
PAYMENTS OF PRINCIPAL
The holders of the notes are entitled to receive payments of principal on each
payment date which generally reflects the collections of principal on the
mortgage loans during the preceding calendar month.
In addition, in accordance with the over-collateralization features of the
transaction, holders may also receive extra payments of principal from the
excess interest on that payment date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the notes
consists solely of:
o excess spread,
o over-collateralization, and
o the note insurance policy.
THE MORTGAGE LOANS
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business purpose loans and consumer purpose
home equity loans secured by first or second mortgages or deeds of trust on
residential or commercial real properties.
On the closing date, the trust will purchase the mortgage loans. The aggregate
principal balance of the mortgage loans will be approximately $275,000,000.
S-1
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SERVICING OF THE MORTGAGE LOANS
American Business Credit, Inc. will act as servicer and will be obligated to
service and administer the mortgage loans on behalf of the trust, for the
benefit of the note insurer and the holders of the notes.
OPTION OF THE CERTIFICATEHOLDERS TO CALL THE NOTES
The majority holder of the trust certificates may, at its option, call the notes
on any payment date on which the aggregate outstanding principal balance of the
mortgage loans is equal to or less than 10% of the aggregate original principal
balance of the mortgage loans as of the cut-off date. If such holder does not
exercise its right to call the notes on the first payment date on which it is
entitled to do so, the servicer will have the right to call the notes. If the
notes are not called on the first payment date on which the aggregate
outstanding principal balance of the mortgage loans is equal to or less than 10%
of the aggregate original principal balance of the mortgage loans as of the
cut-off date, the interest rate payable on the notes will be increased as
described herein. The note insurer must consent to the call on the notes if the
call would result in a draw under the policy.
ERISA CONSIDERATIONS
Subject to the conditions described under "ERISA Considerations" herein, the
notes may be purchased by any employee benefit plan or other retirement
arrangement subject to ERISA or the Internal Revenue Code.
FEDERAL INCOME TAX STATUS
It is the opinion of Morgan, Lewis & Bockius LLP, special tax counsel to the
trust, that for federal income tax purposes
o the notes will be characterized as indebtedness, and
o the trust will not be characterized as an association, or a publicly traded
partnership, taxable as a corporation or a taxable mortgage pool.
Each noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
RATINGS
In order to be issued, the notes must be rated "AAA" by Standard & Poor's and
"Aaa" by Moody's, taking into account the note insurance policy issued with
respect to the notes. These ratings may be lowered, qualified or withdrawn by
the rating agencies.
S-2
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RISK FACTORS
In addition to the risk factors discussed in the prospectus,
prospective noteholders should consider, among other things, the following
additional factors in connection with the purchase of the notes. Unless
otherwise noted, all statistical percentages are based upon the mortgage loan
pool that existed on a statistical calculation date of November 9, 2000.
LESS STRINGENT UNDERWRITING STANDARDS AND THE RESULTANT POTENTIAL FOR
DELINQUENCIES ON THE MORTGAGE LOANS COULD LEAD TO LOSSES ON YOUR SECURITIES.
The mortgage loans were made, in part, to borrowers who, for one reason
or another, are not able, or do not wish, to obtain financing from
traditional sources such as commercial banks. These mortgage loans may
be considered to be of a riskier nature than mortgage loans made by
traditional sources of financing, so that the holders of the notes may
be deemed to be at greater risk than if the mortgage loans were made to
other types of borrowers.
The underwriting standards used in the origination of the mortgage
loans held by the trust are generally less stringent than those of
Fannie Mae or Freddie Mac with respect to a borrower's credit history
and in certain other respects. Borrowers on the mortgage loans may have
an impaired or unsubstantiated credit history. As a result of this less
stringent approach to underwriting, the mortgage loans purchased by the
trust may experience higher rates of delinquencies, defaults and
foreclosures than mortgage loans underwritten in a manner which is more
similar to the Fannie Mae and Freddie Mac guidelines.
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS IN PARTICULAR JURISDICTIONS MAY
RESULT IN GREATER LOSSES IF THOSE JURISDICTIONS EXPERIENCE ECONOMIC DOWNTURNS.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets,
and, consequently, may experience higher rates of loss and delinquency
on mortgage loans generally. Any concentration of the mortgage loans in
such a region may present risk considerations in addition to those
generally present for similar mortgage-backed securities without such
concentration. The mortgaged properties underlying the mortgage loans
are located primarily on the eastern seaboard of the United States.
This may subject the mortgage loans held by the trust to the risk that
a downturn in the economy in this region of the country would more
greatly affect the pool than if the pool were more diversified.
In particular, the following percentages of mortgage loans on the
statistical calculation date were secured by mortgaged properties
located in the following states:
NEW YORK NEW JERSEY PENNSYLVANIA FLORIDA
-------- ---------- ------------ -------
26.41% 13.21% 8.42% 7.65%
Because of the relative geographic concentration of the mortgage loans
within the States of New York, New Jersey, Pennsylvania and Florida,
losses on the mortgage loans may be higher than would be the case if
the mortgage loans were more geographically diversified. For example,
certain of the mortgaged properties may be more susceptible to certain
types of special hazards, such as earthquakes, hurricanes, floods, and
other natural disasters and major civil disturbances, than residential
or commercial properties located in other parts of the country. In
addition, the economies of New York, New Jersey, Pennsylvania and
Florida may be adversely affected to a greater degree than the
economies of other areas of the country by
S-3
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certain regional developments. If the New York, New Jersey,
Pennsylvania and Florida residential or commercial real estate markets
experience an overall decline in property values after the dates of
origination of the respective mortgage loans, then the rates of
delinquencies, foreclosures and losses on the mortgage loans may
increase and such increase may be substantial.
A PORTION OF THE MORTGAGE LOANS REQUIRE LARGE BALLOON PAYMENTS AT MATURITY;
THESE BALLOON LOANS MAY INVOLVE A GREATER RISK OF DEFAULT DUE TO THESE LARGE
PAYMENTS, WHICH COULD LEAD TO LOSSES ON YOUR NOTES.
Approximately 46.00% of the mortgage loans on the statistical
calculation date are not fully amortized over their terms and instead
require substantial balloon payments on their maturity dates. Because
the principal balances of these balloon loans do not fully amortize
over their term, these balloon loans may involve greater risks of
default than mortgage loans whose principal balance is fully amortized
over the term of the mortgage loan. The borrower's ability to pay the
balloon amount due at maturity of his or her balloon loan will depend
on the borrower's ability to obtain adequate refinancing or funds from
other sources to repay the balloon loan. The originators have only
limited historical default data with respect to their balloon loans and
they do not believe that their data is sufficient to predict the
default experience of the balloon loans.
Even assuming that the mortgaged properties provide adequate security
for the balloon loans, substantial delays and foreclosure costs could
be encountered in connection with the liquidation of defaulted mortgage
loans and corresponding delays in the receipt of proceeds by the
holders of the notes could occur.
A PORTION OF THE MORTGAGE LOANS ARE SECURED BY SUBORDINATE MORTGAGES; IN THE
EVENT OF A DEFAULT, THESE MORTGAGE LOANS ARE MORE LIKELY TO EXPERIENCE LOSSES.
Approximately 15.18% of the mortgage loans on the statistical
calculation date are secured by subordinate or junior mortgages which
are subordinate to the rights of the holder of the related senior
mortgages. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal
balance of the mortgage loan only to the extent that the claims, if
any, of each related senior mortgagee are satisfied in full, including
any related foreclosure costs. In addition, a holder of a junior
mortgage may not foreclose on the mortgaged property securing such
mortgage unless it either pays the entire amount of the senior
mortgages to the mortgagees at or prior to the foreclosure sale or
undertakes the obligation to make payments on each senior mortgage in
the event of default thereunder. In servicing business and consumer
purpose home equity loans in its portfolio, the servicer will generally
satisfy or reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any amount so
paid will be recoverable from future payments and collections on the
mortgage loans or otherwise. The trust will have no source of funds to
satisfy any senior mortgage or make payments due to any senior
mortgagee.
An overall decline in the residential or commercial real estate markets
could adversely affect the values of the mortgaged properties and cause
the outstanding principal balances of the mortgage loans, together with
the primary senior financing thereon, to equal or exceed the value of
the mortgaged properties. This type of a decline would adversely affect
the position of a second mortgagee before having the same effect on the
related first mortgagee. A rise in interest rates over a period of time
and the general condition of the mortgaged property as well as other
factors may have the effect of reducing the value of the mortgaged
property from the appraised
S-4
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value at the time the mortgage loan was originated. If there is a
reduction in value of the mortgaged property, the ratio of the amount
of the mortgage loan to the value of the mortgaged property may
increase over what it was at the time the mortgage loan was originated.
This type of increase may reduce the likelihood of liquidation or other
proceeds being sufficient to satisfy the mortgage loan after
satisfaction of any senior liens.
PREPAYMENTS ON THE MORTGAGE LOANS COULD LEAD TO SHORTFALLS IN THE PAYMENT OF
INTEREST ON YOUR NOTE.
The scheduled monthly payment dates with respect to the mortgage loans
occur throughout a month. 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. However, such
principal receipts will only be passed through to the holders of the
notes once a month on the payment date which follows the calendar month
in which such prepayment was received by the servicer. The servicer is
obligated to pay, without any right of reimbursement, those shortfalls
in interest collections payable on the notes that are attributable to
the difference between the interest paid by a mortgagor in connection
with a prepayment in full and thirty days' interest on such mortgage
loan, but only to the extent of the servicing fees for such mortgage
loan for such calendar month.
If the servicer fails to make such payments or the shortfall exceeds
the servicing fee, there will be less funds available for the payment
of interest on the notes. Such shortfalls of interest, if they result
in the inability of the trust to pay the full amount of the current
interest on the notes, are not covered by the policy.
BECAUSE THE RATINGS OF THE NOTES ARE DEPENDENT UPON THE CREDITWORTHINESS OF THE
NOTE INSURER, A DOWNGRADE OF THE NOTE INSURER COULD CAUSE A DOWNGRADE OF THE
NOTES.
The ratings of the notes will depend primarily on the creditworthiness
of the note insurer as the provider of the policy relating to the
notes. Any reduction in the note insurer's insurance financial strength
and claims-paying ability ratings could result in a reduction of the
ratings on the notes.
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included at the
end of this prospectus supplement under the heading "Glossary."
TRANSACTION OVERVIEW
PARTIES
The Trust. ABFS Mortgage Loan Trust 2000-4, a Delaware statutory
business trust. The principal executive office of the trust is in Wilmington,
Delaware, in care of the owner trustee, at the address of the owner trustee
specified below.
The Depositor. Bear Stearns Asset Backed Securities, Inc., a Delaware
corporation. The principal executive office of the depositor is located at 245
Park Avenue, 4th Floor, New York, New York 10167, and its telephone number is
(212) 272-2000.
The Seller. ABFS 2000-4, Inc., a Delaware corporation. The principal
executive office of the seller is at 103 Springer Building, 3411 Silverside
Road, Wilmington, Delaware 19810, and its telephone number is (302) 478-6160.
S-5
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The Originators. American Business Credit, Inc., a Pennsylvania
corporation, HomeAmerican Credit, Inc. d/b/a Upland Mortgage, a Pennsylvania
corporation, and New Jersey Mortgage and Investment Corp., a New Jersey
corporation, originated or purchased the mortgage loans. For a description of
the business of the originators, see "The Originators, the Seller and the
Servicer" herein.
The Servicer and the Subservicers. American Business Credit will act as
servicer of the mortgage loans, and Upland Mortgage and New Jersey Mortgage will
act as subservicers with respect to different portions of the mortgage loans.
For a description of the business of the servicer, see "The Originators, the
Seller and the Servicer" herein.
The Indenture Trustee and the Collateral Agent. The Chase Manhattan
Bank, a New York banking corporation. The corporate trust office of the
indenture trustee is located at 450 West 33rd Street, 14th Floor, New York, New
York 10001 and its telephone number is (212) 946-3200. For a description of the
indenture trustee and the collateral agent, see "The Indenture Trustee and the
Collateral Agent" herein.
The Owner Trustee. First Union Trust Company, National Association, a
national banking association. The corporate trust office of the owner trustee is
located at One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801, and its telephone number is (302) 888-7539. For a description of the
owner trustee and its responsibilities with respect to the notes and the
mortgage loans, see "The Owner Trustee" herein.
The Note Insurer. Ambac Assurance Corporation, a Wisconsin-domiciled
stock insurance corporation. The note insurer will issue a financial guaranty
insurance policy for the benefit of the holders of the notes. For a description
of the business and selected financial information of the note insurer, see "The
Policy" and "The Note Insurer" herein.
The Rating Agencies. Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, Inc. and Moody's Investors Service, Inc. will issue
ratings with respect to the notes.
THE TRANSACTION
Formation of the Trust and Issuance of the Trust Certificates. The
trust will be formed pursuant to the terms of a Trust Agreement, dated as of
December 1, 2000, between the owner trustee, the depositor and the seller and
the filing of a certificate of trust with the Secretary of State of the State of
Delaware. Under the Trust Agreement, the trust will also issue one class of
trust certificates, evidencing the entire beneficial ownership interest in the
trust.
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described herein under "The Originators, the Seller
and the Servicer." The originators will sell the mortgage loans to the seller,
and the seller will sell the mortgage loans to the depositor pursuant to an
Unaffiliated Seller's Agreement, dated as of December 1, 2000, among the
originators, the seller and the depositor. The depositor will sell the mortgage
loans to the trust pursuant to a Sale and Servicing Agreement, dated as of
December 1, 2000, among the depositor, the trust, the servicer, the collateral
agent and the indenture trustee. The servicer will service the mortgage loans
pursuant to the terms of the Sale and Servicing Agreement.
Issuance of the Notes. Pursuant to the terms of an Indenture, dated as
of December 1, 2000, between the trust and the indenture trustee, the trust will
pledge the trust estate to the indenture trustee, for the benefit of the holders
of the notes and the note insurer, and issue the notes.
S-6
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Issuance of the Policy. The note insurer will issue the policy pursuant
to the terms of an Insurance and Indemnity Agreement, dated as of December 21,
2000, among the note insurer, the trust, the depositor, the seller, the
originators, the servicer and the indenture trustee.
THE MORTGAGE LOAN POOL
Difference between Statistical Calculation Date and Closing Date Pool.
The statistical information presented in this prospectus supplement concerning
the mortgage loans is based on the pool of mortgage loans that existed on a
statistical calculation date, in this case November 9, 2000. The mortgage loans
aggregated $239,995,183.40 as of the statistical calculation date. The seller
expects that the actual closing date mortgage loan pool will represent
approximately $275,000,000 in aggregate principal balance of mortgage loans,
measured as of the Cut-Off Date. The additional mortgage loans will represent
mortgage loans acquired or to be acquired by the trust on or prior to the
closing date. On the closing date, in addition to the mortgage loans included in
the statistical information as of the statistical calculation date, the seller
expects to deliver a substantial amount of additional mortgage loans that will
have been originated after the statistical calculation date but before the
closing date. In addition, with respect to the mortgage loan pool as of the
statistical calculation date as to which statistical information is presented
herein, some amortization will occur prior to the closing date. Moreover,
certain mortgage loans included in the mortgage loan pool as of the statistical
calculation date may prepay in full, or may be determined not to meet the
eligibility requirements for the final mortgage loan pool, and may not be
included in the final mortgage loan pool. As a result of the foregoing, the
statistical distribution of characteristics as of the closing date for the final
mortgage loan pool will vary somewhat from the statistical distribution of such
characteristics as of the statistical calculation date as presented in this
prospectus supplement, although such variance should not be material.
The mortgage loans will be predominantly business or consumer purpose
residential home equity loans used to refinance an existing mortgage loan, to
consolidate debt, or to obtain cash proceeds in order to provide funds for
working capital for business, business expansion, equipment acquisition, or
personal acquisitions by borrowing against the mortgagor's equity in the related
mortgaged property. The mortgaged properties securing the mortgage loans consist
primarily of single-family residences -- which may be detached, part of a
multi-family dwelling, a condominium unit, a townhouse, a manufactured home or a
unit in a planned unit development -- and commercial multiple purpose, or mixed
use properties. The mortgaged properties may be owner-occupied properties, which
include second and vacation homes, non-owner occupied investment properties or
business purpose properties.
Approximately 83.98% of the mortgage loans have a prepayment fee
clause. Such prepayment fee clauses generally provide that the mortgagor pay,
upon prepayment, one or more of the following:
o a fee equal to a percentage, which is negotiated at origination,
of the outstanding principal balance of the mortgage loan;
o a fee which is designed to allow the holder of the mortgage note
to earn interest on the mortgage loan as if the mortgage loan
remained outstanding until a designated point in time; or
o a fee equal to the amount of interest on the outstanding principal
balance of the mortgage loan calculated pursuant to a rule of 78's
calculation, which has the effect of requiring the mortgagor to
pay a greater amount of interest earlier than would be required to
be paid if the actuarial method of calculating interest was
utilized.
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The following section describes the statistical characteristics of the
mortgage loans. Unless otherwise noted, all statistical percentages in this
prospectus supplement are approximate and are measured by the aggregate
principal balance of the mortgage loans as of the statistical calculation date.
The combined loan-to-value ratios, or CLTV's, described herein were
calculated based upon the appraised values of the related mortgaged properties
used for loan origination. No assurance can be given that such appraised values
of the mortgaged properties have remained or will remain at the levels that
existed on the dates of origination of the related mortgage loans. If property
values decline such that the outstanding principal balances of the mortgage
loans, together with the outstanding principal balances of any first liens,
become equal to or greater than the value of the mortgaged properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those historically experienced by the servicer, as set forth below under "The
Originators, the Seller and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry generally.
The Mortgage Loan Pool . As of the statistical calculation date, the
mortgage loans had the following characteristics:
o there were 2,982 mortgage loans under which the related mortgaged
properties are located in 34 states and the District of Columbia;
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$239,995,183.40;
o the minimum principal balance was $9,801.79, the maximum principal
balance was $581,000.00 and the average principal balance was
$80,481.28;
o the mortgage interest rates ranged from 9.650% to 16.990% per
annum, and the weighted average mortgage interest rate was
approximately 12.023% per annum;
o the original term to stated maturity ranged from 36 months to 360
months and the weighted average original term to stated maturity
was approximately 245 months;
o the remaining term to stated maturity ranged from 35 months to 360
months and the weighted average remaining term to stated maturity
was approximately 244 months;
o approximately 54.00% of the mortgage loans by aggregate principal
balance require monthly payments of principal that will fully
amortize these mortgage loans by their respective maturity dates,
and approximately 46.00% of the mortgage loans by aggregate
principal balance are balloon loans;
o the weighted average CLTV was approximately 76.27%;
o approximately 84.82% of the mortgage loans by aggregate principal
balance are secured by first liens, and approximately 15.18% of
the mortgage loans by aggregate principal balance are secured by
second liens; and
o approximately 26.41%, 13.21%, 8.42% and 7.65% of the mortgage
loans by aggregate principal balance are secured by mortgaged
properties located in the States of New York, New Jersey,
Pennsylvania and Florida, respectively.
The following tables set forth certain statistical information with
respect to the mortgage loans. Due to rounding, the percentages shown may not
precisely total 100.00%.
S-8
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
STATE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
----- ------------------------ ----------------- ---------------------------
<S> <C> <C> <C>
New York 621 $ 63,375,073.47 26.41%
New Jersey 365 31,709,459.43 13.21
Pennsylvania 362 20,218,129.65 8.42
Florida 243 18,369,906.15 7.65
Ohio 192 12,247,078.26 5.10
Massachusetts 134 11,669,109.00 4.86
Illinois 142 10,600,084.78 4.42
Virginia 92 8,383,749.25 3.49
North Carolina 104 8,035,233.21 3.35
Georgia 108 7,844,766.26 3.27
Michigan 95 6,883,989.77 2.87
Maryland 62 6,712,285.26 2.80
Other 462 33,946,318.91 14.14
----- ----------------- ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================= ======
</TABLE>
o "Other" includes states and the District of Columbia with under
2.00% individual concentrations of the mortgage loans.
S-9
<PAGE>
DISTRIBUTION OF CLTV RATIOS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
CLTV RATIO RANGE MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
---------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
0.01% =< CLTV < = 40.00% 155 $ 7,924,459.85 3.30%
40.01 =< CLTV < = 50.00 141 7,716,459.80 3.22
50.01 =< CLTV < = 60.00 201 13,657,084.58 5.69
60.01 =< CLTV < = 70.00 412 31,394,507.15 13.08
70.01 =< CLTV < = 80.00 910 77,785,744.53 32.41
80.01 =< CLTV < = 90.00 1,153 101,154,654.92 42.15
90.01 =< CLTV < = 100.00 10 362,272.57 0.15
----- ------------------ ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================== ======
</TABLE>
o The minimum and maximum combined loan-to-value ratios of the mortgage loans
as of the statistical calculation date are approximately 7.80% and 100.00%
respectively, and the weighted average combined loan-to-value ratio of the
mortgage loans as of the statistical calculation date is approximately
76.27%.
DISTRIBUTION OF GROSS INTEREST RATES
<TABLE>
<CAPTION>
RANGE OF GROSS NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
-------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
9.000% =< Gross Coupon <= 9.999% 120 $ 14,868,732.81 6.20%
10.000 =< Gross Coupon <= 10.999 622 64,547,144.65 26.90
11.000 =< Gross Coupon <= 11.999 866 76,632,163.67 31.93
12.000 =< Gross Coupon <= 12.999 582 38,447,368.62 16.02
13.000 =< Gross Coupon <= 13.999 387 17,094,983.01 7.12
14.000 =< Gross Coupon <= 14.999 165 7,599,767.83 3.17
15.000 =< Gross Coupon <= 15.999 33 3,398,202.38 1.42
16.000 =< Gross Coupon <= 16.999 207 17,406,820.43 7.25
----- ----------------- ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================= ======
</TABLE>
o The weighted average gross interest rate of the mortgage loans as of the
statistical calculation date is approximately 12.023%.
S-10
<PAGE>
DISTRIBUTION OF ORIGINAL TERM TO MATURITY
(IN MONTHS)
<TABLE>
<CAPTION>
RANGE OF ORIGINAL TERM NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
----------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
0 =< Orig. Term <= 60 43 $ 1,759,920.01 0.73%
61 =< Orig. Term <= 120 242 11,262,727.02 4.69
121 =< Orig. Term <= 180 1,102 82,157,373.65 34.23
181 =< Orig. Term <= 240 975 74,332,294.67 30.97
241 =< Orig. Term <= 300 79 8,058,999.12 3.36
301 =< Orig. Term <= 360 541 62,423,868.93 26.01
----- ------------------ ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================== ======
</TABLE>
o The weighted average original term to maturity of the mortgage loans as of
the statistical calculation date is approximately 245 months.
DISTRIBUTION OF REMAINING TERM TO MATURITY
(in months)
<TABLE>
<CAPTION>
RANGE OF REMAINING TERM NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
----------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
0 =< Rem. Term <= 60 43 $ 1,759,920.01 0.73%
61 =< Rem. Term <= 120 242 11,262,727.02 4.69
121 =< Rem. Term <= 180 1,102 82,157,373.65 34.23
181 =< Rem. Term <= 240 975 74,332,294.67 30.97
241 =< Rem. Term <= 300 79 8,058,999.12 3.36
301 =< Rem. Term <= 360 541 62,423,868.93 26.01
----- ------------------ ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================== ======
</TABLE>
o The weighted average remaining term to maturity of the mortgage loans as of
the statistical calculation date is approximately 244 months.
S-11
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF ORIGINAL NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
------------------ -------------- ----------------- ---------------------------
<S> <C> <C> <C>
$1 =< Balance <= $25,000 285 $6,053,278.02 2.52%
25,001 =< Balance <= 50,000 876 32,845,296.03 13.69
50,001 =< Balance <= 75,000 680 42,127,109.41 17.55
75,001 =< Balance <= 100,000 381 33,086,194.03 13.79
100,001 =< Balance <= 125,000 243 27,438,025.78 11.43
125,001 =< Balance <= 150,000 146 20,250,022.18 8.44
150,001 =< Balance <= 175,000 110 17,928,002.13 7.47
175,001 =< Balance <= 200,000 83 15,521,340.10 6.47
200,001 =< Balance <= 225,000 68 14,493,931.23 6.04
225,001 =< Balance <= 250,000 43 10,312,465.65 4.30
250,001 =< Balance <= 275,000 25 6,507,356.42 2.71
275,001 =< Balance 42 13,432,162.42 5.60
----- --------------- ------
Total 2,982 $239,995,183.40 100.00%
===== =============== ======
</TABLE>
o The average original principal balance of the mortgage loans as of the
statistical calculation date is approximately $80,580.35.
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
------------------ -------------- ----------------- ---------------------------
<S> <C> <C> <C>
$1 =< Balance <= $25,000 288 $6,127,904.49 2.55%
25,001 =< Balance <= 50,000 877 32,970,298.25 13.74
50,001 =< Balance <= 75,000 677 42,002,247.04 17.50
75,001 =< Balance <= 100,000 380 33,011,427.71 13.76
100,001 =< Balance <= 125,000 243 27,438,025.78 11.43
125,001 =< Balance <= 150,000 146 20,250,022.18 8.44
150,001 =< Balance <= 175,000 110 17,928,002.13 7.47
175,001 =< Balance <= 200,000 84 15,721,146.46 6.55
200,001 =< Balance <= 225,000 67 14,294,124.87 5.96
225,001 =< Balance <= 250,000 43 10,312,465.65 4.30
250,001 =< Balance <= 275,000 26 6,782,283.35 2.83
275,001 =< Balance 41 13,157,235.49 5.48
----- --------------- ------
Total 2,982 $239,995,183.40 100.00%
===== =============== ======
</TABLE>
o The average current principal balance of the mortgage loans as of the
statistical calculation date is approximately $80,481.28.
S-12
<PAGE>
DISTRIBUTION BY LIEN STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
LIEN STATUS MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
----------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
First Lien 2,205 $ 203,558,895.68 84.82%
Second Lien 777 36,436,287.72 15.18
----- ------------------- ------
Total 2,982 $ 239,995,183.40 100.00%
===== =================== ======
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
----------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
Fully Amortizing 1,635 $ 129,609,012.74 54.00%
Balloon Loans 1,347 110,386,170.66 46.00
----- ------------------ ------
Total 2,982 $ 239,995,183.40 100.00%
===== ================== ======
</TABLE>
DISTRIBUTION BY OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
---------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
Owner Occupied 2,704 $215,256,925.44 89.69%
Non-Owner Occupied 176 14,369,711.79 5.99
Other 80 8,514,616.86 3.55
Second Home 22 1,853,929.31 0.77
----- --------------- ------
Total 2,982 $239,995,183.40 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID % OF STATISTICAL CALCULATION DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
Single Family 2,172 $165,449,040.48 68.94%
2-4 Family 328 36,977,534.26 15.41
Townhouse 194 10,664,446.41 4.44
Mixed Use 82 8,403,165.95 3.50
Condominium 87 6,017,254.77 2.51
Planned Unit Development 43 4,693,100.36 1.96
Commercial 29 3,653,398.11 1.52
Manufactured Housing 34 2,220,743.01 0.93
Multi-Family 13 1,916,500.05 0.80
----- --------------- ------
Total 2,982 $239,995,183.40 100.00%
===== =============== ======
</TABLE>
S-13
<PAGE>
THE ORIGINATORS, THE SELLER AND THE SERVICER
American Business Credit, the servicer and an originator, is a
wholly-owned subsidiary of American Business Financial Services, Inc. Upland
Mortgage, an originator and a subservicer, is a wholly-owned subsidiary of
American Business Credit. New Jersey Mortgage, an originator and a subservicer,
is a wholly-owned subsidiary of American Business Credit. The seller is owned by
American Business Financial Services, Inc.
American Business Financial Services is a financial services holding
company operating, through its subsidiaries, primarily in the eastern half of
the United States. American Business Financial Services, through American
Business Credit, originates, sells and services loans to businesses secured by
real estate and other business assets, and, through Upland Mortgage and New
Jersey Mortgage, originates, sells and services non-conforming mortgage loans,
typically to credit impaired borrowers, secured by mortgages on single-family
residences. In addition, Upland Mortgage operates a bank alliance program with
several financial institutions pursuant to which Upland Mortgage will purchase
home equity loans that do not meet the underwriting guidelines of the selling
institution, but meet Upland Mortgage's underwriting criteria.
American Business Financial Services' customers currently consist
primarily of two groups. The first category of customers includes credit
impaired borrowers who generally are unable to obtain financing from banks or
savings and loan associations that have historically provided loans only to
individuals with the most favorable credit characteristics. These borrowers
generally have impaired or unsubstantiated credit characteristics and/or
unverifiable income and respond favorably to American Business Financial
Services' marketing efforts. The second category of customers includes borrowers
who would qualify for loans from traditional lending sources but elect to
utilize American Business Financial Services' products and services. American
Business Financial Services' experience has indicated that these borrowers are
attracted to American Business Financial Services' loan products as a result of
its marketing efforts, the personalized service provided by American Business
Financial Services' staff of lending officers and the timely response to loan
requests. Historically, both categories of customers have been willing to pay
American Business Financial Services' origination fees and interest rates which
are generally higher than those charged by traditional lending sources. American
Business Financial Services also markets mortgage loans to borrowers with
favorable credit histories.
American Business Financial Services was incorporated in Delaware in
1985. American Business Financial Services is a publicly traded company and its
common stock is listed on the Nasdaq National Market System under the symbol
"ABFI." The principal executive offices of American Business Financial Services
and its operating entities are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004. Its
telephone number at such address is (610) 668-2440.
THE ORIGINATORS
The mortgage loans were or will be originated or purchased by the
originators directly in the ordinary course of their business. The originators
may originate or purchase loans in up to 47 states and the District of Columbia.
The originators' primary source of loan product is retail marketing, directly
targeting small businesses and consumers through various advertising media.
The business purpose mortgage loans were or will be originated by
American Business Credit, except for mortgage loans which are secured by
properties located in states where the originating or purchasing of mortgage
loans requires a mortgage banking license, in which case Upland Mortgage has or
will originate or purchase such mortgage loans. The consumer purpose mortgage
loans were or will be originated or purchased by Upland Mortgage and New Jersey
Mortgage.
S-14
<PAGE>
American Business Credit. American Business Credit originates, services
and sells business purpose loans collateralized by real estate. American
Business Credit's operating subsidiaries include:
o Upland Mortgage, a consumer purpose residential mortgage company;
o Processing Service Center, Inc., a loan processor for home equity loans
generated by the bank alliance program;
o American Business Leasing, Inc., a small-ticket equipment leasing company;
o Tiger Relocation Company, a holder of foreclosed real estate;
o New Jersey Mortgage, a residential mortgage company; and
o NJLQ Holdings, Inc., a holder of foreclosed liquor licenses in New Jersey.
American Business Credit was incorporated in 1988 pursuant to the laws
of the Commonwealth of Pennsylvania and maintains its corporate headquarters in
the metropolitan Philadelphia area.
American Business Credit currently originates business purpose loans on
a regular basis in Connecticut, Delaware, Florida, Georgia, Illinois, Indiana,
Maryland, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South
Carolina and Virginia through a network of salespeople and its business loan web
site, www.abceasyloan.com. American Business Credit focuses its marketing
efforts on small businesses who do not meet all of the credit criteria of
commercial banks and small businesses that its research indicates may be
predisposed to using its products and services.
American Business Credit originates business purpose loans to
corporations, partnerships, sole proprietors and other business entities for
various business purposes including, but not limited to, working capital,
business expansion, equipment acquisition and debt consolidation. American
Business Credit does not target any particular industries or trade groups and,
in fact, take precautions against concentration of loans in any one industry
group. All business purpose loans generally are secured by a first or second
mortgage lien on a principal residence of the borrower or a guarantor of the
borrower or some other parcel of real property, such as office and apartment
buildings and mixed use buildings, owned by the borrower, a principal of the
borrower, or a guarantor of the borrower. In addition, in most cases, these
loans are further collateralized by personal guarantees, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets.
American Business Credit's business purpose loans generally ranged from
$15,000 to $500,000 and had an average loan size of approximately $80,000 for
the loans originated during fiscal year 2000. Generally, American Business
Credit's business purpose loans (i) are made at fixed rates and for terms
ranging from five to 15 years; and (ii) charge origination fees for these loans
of 5.0% to 6.0% of the original principal balance. The weighted average interest
rate charged on the business purpose loans originated by American Business
Credit was 15.99% for fiscal year 2000. The business purpose loans securitized
during the past fiscal year had a weighted average loan-to-value ratio, based
solely upon the real estate collateral securing the loans, of 60.9%. American
Business Credit originated $106.2 million of business purpose loans during
fiscal year 2000.
Generally, American Business Credit computes interest due on its
outstanding loans using the simple interest method. Where permitted by
applicable law, American Business Credit normally imposes a prepayment fee.
Although prepayment fees imposed vary based upon applicable state law, the
prepayment fees on American Business Credit 's business purpose loan documents
normally amount to a
S-15
<PAGE>
significant portion of the outstanding loan balance. American Business Credit
believes that prepayment terms tend to extend the average life of its loans by
discouraging prepayment and that this makes these loans more attractive for
securitization. Whether a prepayment fee is imposed and the amount of such fee,
if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan. American Business Credit makes loans for
various business purposes including, but not limited to, working capital,
business expansion, equipment acquisition and debt-consolidation. American
Business Credit does not target any particular industries or trade pools.
During fiscal year 2000, American Business Credit launched an Internet
loan distribution channel under the name www.abceasyloan.com. The
www.abceasyloan.com web site provides borrowers with convenient access to the
business loan application process, 7 days a week, 24 hours a day. American
Business Credit believes that the addition of this distribution channel
maximizes the efficiency of the application process and could reduce its
transaction costs in the future with a greater volume of loan applications
received via the web page. Throughout the loan processing period, borrowers who
submit applications online are supported by American Business Credit's staff of
highly trained loan officers.
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland Mortgage,
American Business Credit's home equity lending subsidiary, is a Pennsylvania
corporation and was incorporated in May 1991. Upland Mortgage originates home
equity loans primarily to credit-impaired borrowers through various channels
including retail marketing which includes telemarketing operations, direct mail,
radio and television advertisements as well as through Upland's interactive web
site, www.UplandMortgage.com. Home equity loans originated are generally
securitized, but some are sold to one of several third party lenders, at a
premium and with servicing released.
Upland Mortgage originates business loans on behalf of American
Business Credit in instances where state licensing laws require a mortgage
license in order to make such loans. In such circumstances, the credit criteria
and collateral requirements utilized by Upland Mortgage are identical to those
utilized by American Business Credit. As such, American Business Credit's
lending procedures and policies govern Upland Mortgage when it is originating
business purpose mortgage loans.
Home equity loan applications are obtained from potential borrowers
over the phone, in writing, in person or over the Internet through the web site.
The loan request is then processed and closed. The loan processing staff
generally provides its home equity borrowers with a loan approval within 24
hours and closes its home equity loans within approximately ten to fifteen days
of obtaining a loan approval.
Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $70,000 for those originated during fiscal
year 2000. During fiscal year 2000, Upland Mortgage and New Jersey Mortgage
originated or purchased $949.0 million of home equity loans. Generally, home
equity loans are made at fixed rates of interest and for terms ranging from five
to 30 years and generally have origination fees of approximately 2.0% of the
aggregate loan amount. For fiscal year 2000, the weighted average interest rate
received on such loans was 11.28% and the average loan-to-value ratio was 78.9%.
Upland Mortgage and New Jersey Mortgage try to maintain their interest rates and
other charges on home equity loans competitive with the lending rates of other
finance companies and banks. Where permitted by applicable law, a prepayment fee
may be negotiated with the borrower and is generally charged to the borrower on
the prepayment of a home equity loan except in the event the borrower refinances
a home equity loan with Upland Mortgage or New Jersey Mortgage.
Beginning in fiscal year 1996, through Upland Mortgage and in
conjunction with Processing Service Center, Inc., exclusive business
arrangements with several financial institutions were established that provide
for Upland Mortgage's purchase of home equity loans that meet its underwriting
criteria, but do not meet the underlying guidelines of the selling institution
for loans held in their portfolio. This program is called the Bank Alliance
Program. The Bank Alliance Program is designed to provide an
S-16
<PAGE>
additional source of home equity loans. This program targets traditional
financial institutions, such as banks, which because of their strict
underwriting and credit guidelines have generally provided mortgage financing
only to the most credit-worthy borrowers. This program allows these financial
institutions to originate loans to credit-impaired borrowers in order to achieve
community reinvestment goals and to generate fee income and subsequently sell
such loans to Upland Mortgage. Following Upland Mortgage's purchase of the loans
through this program, it holds these loans as available for sale until they are
sold in connection with a future securitization.
The Bank Alliance Program consists of agreements with 31 financial
institutions and provides Upland Mortgage with the opportunity to underwrite,
process and purchase loans generated by the branch networks of such institutions
which consist of over 1,500 branches located in various states throughout the
country. During fiscal year 2000, Upland Mortgage purchased approximately $53.4
million of loans pursuant to this program. It is the intention of Upland
Mortgage to expand the Bank Alliance Program with financial institutions across
the United States.
During fiscal year 1999, Upland Mortgage launched an Internet loan
distribution channel under the name www.UplandMortgage.com. Through this
interactive web site, borrowers can examine available loan options, calculate
interest payments, and submit an application via the Internet. The Upland
Mortgage Internet platform provides borrowers with convenient access to the
mortgage loan application process, 7 days a week, 24 hours a day. Throughout the
loan processing period, borrowers who submit applications online are supported
by Upland Mortgage's staff of highly trained loan officers. During fiscal year
2000, Upland Mortgage continued to phase in advanced Internet technology through
its web site, www.UplandMortgage.com. In addition to the ability to take online
loan applications and utilize an automated rapid credit approval process, both
of which reduce time and manual effort required for loan approval, the site
features proprietary software, Easy Loan Wizard, which provides personalized
services and solutions to retail customers through interactive web dialog.
Upland Mortgage has applied to the U.S. Patent and Trademark Office to patent
this product.
New Jersey Mortgage and Investment Corp. American Business Credit, as
assignee of American Business Financial Services, acquired New Jersey Mortgage,
a mortgage company based in Roseland, New Jersey, and its subsidiaries,
including a leasing company, in October 1997. New Jersey Mortgage originates
conventional first mortgage loans and sells them in the secondary market with
servicing released. These conventional first mortgages are originated primarily
in the eastern region of the United States. New Jersey Mortgage originated $42.6
million of conventional first mortgage loans during fiscal year 2000. New Jersey
Mortgage will formally change its name to American Business Mortgage Services,
Inc., effective January 1, 2001.
The conventional first mortgage loans are secured by one-to four-unit
residential properties located primarily in the eastern region of the United
States. These properties are generally owner-occupied single family residences
but may also include second homes and investment properties. These loans are
generally made through American Household Mortgage, a division of New Jersey
Mortgage, to borrowers with favorable credit histories and are underwritten
pursuant to Freddie Mac or Fannie Mae standards to permit their sale in the
secondary market; however, New Jersey Mortgage also originates first mortgage
loans which do not meet the Freddie Mac or Fannie Mae standards for sale in the
secondary market. Some of these first mortgage loans have balances in excess of
$252,700 and are commonly referred to as jumbo loans.
New Jersey Mortgage typically sells such loans to third parties with
servicing released. New Jersey Mortgage also originates Federal Housing
Authority and Veterans Administration loans which are subsequently sold to third
parties with servicing released. New Jersey Mortgage does not generally retain
the right to collect and service these loans after they are sold. New Jersey
Mortgage originates such loans for sale in the secondary market.
S-17
<PAGE>
Prepayment fees are used by the originators. Historically, a
significant percentage of the business purpose loans originated by American
Business Credit contained prepayment fees and the home equity loans generated by
Upland Mortgage and New Jersey Mortgage charged prepayment fees on less than 50%
of their home equity loans. The originators currently charge prepayment fees on
substantially all of the business purpose loans, and have increased the
percentage of home equity loans originated with prepayment fees to approximately
85% of home equity loans originated. Of all mortgage loans generated by the
American Business Financial Services subsidiaries, home equity loans comprise
approximately 90% of all loans and the remaining 10% are business purpose loans.
The type of prepayment fee obtained on a home equity loan is normally a fixed
percentage of the outstanding principal balance of the loan. A typical
prepayment fee on a home equity loan provides for a fee equal to 5% of the
outstanding principal loan balance if paid within the first three years after
the loan's origination and 2% of the outstanding principal loan balance if
prepaid between three and five years after the loan's origination and no
prepayment fee if the loan is prepaid after five years from the date of
origination. In the case of business purpose loans, the prepayment fee generally
amounts to a significant portion of the outstanding principal loan balance and
is most often calculated on the basis of the Rule of 78s formula, also known as
the "sum of the digits" method.
The ability to charge a prepayment fee is sometimes impacted by state
law, with respect to both home equity loans and business purpose loans. In the
case of home equity loans which have a "balloon" payment feature, whenever
possible, the originators use the Federal Alternative Mortgage Transactions
Parity Act of 1982 to preempt state laws which limit or restrict prepayment
fees. In states that have overridden the Parity Act and in the case of some
fully amortizing home equity loans, state laws may restrict prepayment fees
either by the amount of the prepayment fee or the time period during which it
can be imposed. Similarly, in the case of business purpose loans, some states
prohibit or limit prepayment fees where the loan is below a specific dollar
threshold or is secured by residential real property. See "Certain Legal Aspects
of the Loans -- Enforceability of Prepayment and Late Payment Fees" in the
accompanying prospectus.
MARKETING STRATEGY
The originators concentrate their marketing efforts primarily on two
potential customer groups. One group, based on historical profiles, has a
tendency to select their loan products because of their personalized service and
timely response to loan requests. The other group is comprised of
credit-impaired borrowers who satisfy the originators' underwriting guidelines.
New Jersey Mortgage also markets conventional first mortgage loans to borrowers
with favorable credit histories.
American Business Credit's marketing efforts for business purpose loans
focus on its niche market of selected small businesses located in its market
area which generally includes the eastern half of the United States. American
Business Credit targets businesses which it believes would qualify for loans
from traditional lending sources, but would elect to use its products and
services. American Business Credit's experience indicates that these borrowers
are attracted to it as a result of its marketing efforts, the personalized
service provided by its staff of highly trained lending officers and its timely
response to loan applications. Historically, such customers have been willing to
pay American Business Credit's origination fees and interest rates which are
generally higher than those charged by traditional lending sources.
American Business Credit markets business purpose loans through various
forms of advertising, its business loan web site, www.abceasyloan.com and a
direct sales force. Advertising media used includes large direct mail campaigns
and newspaper and radio advertising. American Business Credit's commissioned
sales staff, which consists of full-time highly trained salespersons, is
responsible for converting advertising leads into loan applications. American
Business Credit utilizes a proprietary training program involving extensive and
on-going training of its lending officers. American Business
S-18
<PAGE>
Credit's sales staff uses significant person-to-person contact to convert
advertising leads into loan applications and maintains contact with the borrower
throughout the application process.
Upland Mortgage markets home equity loans through telemarketing, radio
and television advertising, direct mail campaigns and through its web site,
www.UplandMortgage.com. During fiscal year 2000, the Consumer Mortgage Group,
which includes Upland Mortgage, New Jersey Mortgage and Processing Service
Center, redirected its marketing mix to focus on targeted direct mail, which it
believes delivers more leads at a lower cost than broadcast marketing channels.
The Consumer Mortgage Group's integrated approach to media advertising which
utilizes a combination of direct mail and Internet advertising is intended to
maximize the effect of its advertising campaigns. The Consumer Mortgage Group
also utilizes a network of loan brokers, the Bank Alliance Program and the
website of American Business Financial Services as a source for additional
leads.
The Consumer Mortgage Group's marketing efforts for home equity loans
are strategically located throughout the eastern region of the United States.
Upland Mortgage utilizes its branch offices in various eastern states to market
its loans. Upland Mortgage intends to open additional sales offices in the
future. Loan processing, underwriting, servicing and collection procedures are
performed at its centralized operating office located in Bala Cynwyd,
Pennsylvania.
New Jersey Mortgage markets conventional first mortgage loans through
its network of loan brokers. New Jersey Mortgage's marketing efforts for
conventional first mortgage loans are concentrated in the mid-Atlantic region of
the United States. In addition, New Jersey Mortgage markets conventional first
mortgage loans under the name American Household Mortgage.
UNDERWRITING PROCEDURES AND PRACTICES
Summarized below are some of the policies and practices which are
followed in connection with the origination of business purpose loans, home
equity loans and conventional first mortgage loans. These policies and practices
may be altered, amended and supplemented as conditions warrant in the discretion
of management.
Loan underwriting standards are applied to evaluate prospective
borrowers' credit standing and repayment ability as well as the value and
adequacy of the mortgaged property as collateral. Initially, the prospective
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the description of the prospective borrower's
financial condition, the borrower is required to provide information concerning
assets, liabilities, income, credit, employment history and other demographic
and personal information. If the application demonstrates the prospective
borrower's ability to repay the debt as well as sufficient income and equity,
loan processing personnel generally obtain and review an independent credit
bureau report on the credit history of the borrower and verification of the
borrower's income. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective borrower
has sufficient monthly income available to meet the prospective borrower's
monthly obligations.
S-19
<PAGE>
The following table outlines the key parameters of the major credit
grades of the originators' current underwriting guidelines.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
"A" CREDIT GRADE "B" CREDIT GRADE "C" CREDIT GRADE "D" CREDIT GRADE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Has good credit but might Pays the majority of Marginal credit history Designed to provide a
Repayment have some minor delinquency. accounts on time but has which is offset by other borrower with poor credit
some 30 and/or 60 day positive attributes. history an opportunity to
delinquency. correct past credit problems
through lower monthly
payments.
------------------------------------------------------------------------------------------------------------------------------------
Existing Current at application time Current at application time Cannot exceed four 30-day Must be paid in full from
Mortgage and a maximum of two 30 day and a maximum of four 30 day delinquencies or two 60 day loan proceeds and no more
Loans delinquencies in the past 12 delinquencies in the past 12 delinquencies in the past 12 than 120 days delinquent.
months. months. months.
------------------------------------------------------------------------------------------------------------------------------------
Non-Mortgage Major credit and installment Major credit and installment Major credit and installment Major and minor credit
Credit debt should be current but debt can exhibit some minor debt can exhibit some minor delinquency is acceptable,
may exhibit some minor 30 30 and/or 60 day 30 and/or 90 day but must demonstrate some
day delinquency. Minor delinquency. Minor credit delinquency. Minor credit payment regularity.
credit may exhibit some may exhibit up to 90 day may exhibit more serious
minor delinquency. delinquency. delinquency.
------------------------------------------------------------------------------------------------------------------------------------
Bankruptcy Discharged more than 2 years Discharged more than 2 years Discharged more than 2 years Discharged prior to closing.
Filings with reestablished credit. with reestablished credit. with reestablished credit.
------------------------------------------------------------------------------------------------------------------------------------
Debt Generally not to exceed 50%. Generally not to exceed 50%. Generally not to exceed 55%. Generally not to exceed 55%.
Service-
to-Income
------------------------------------------------------------------------------------------------------------------------------------
Owner Generally 80% (exception to Generally 80% (exception to Generally 70% (exception to Generally 60% (exception to
Occupied: 90%) for a 1-4 family 85%) for a 1-4 family 85%) for a 1-4 family 70%) for a 1-4 family
Loan-to- dwelling residence; 80% for dwelling residence; 75% for dwelling residence; 65% for dwelling residence.
value a condominium. a condominium. a condominium.
ratio
------------------------------------------------------------------------------------------------------------------------------------
Non-Owner Generally 80% for a 1-4 Generally 70% for a 1-4 Generally 60% for a 1-4 N/A
Occupied: family dwelling or family dwelling or family dwelling or
Loan-to- condominium. condominium. condominium.
value
ratio
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<PAGE>
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
purpose loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60% percent. In addition, in substantially all instances, American Business
Credit also receives additional collateral in the form of, among other things,
personal guarantees, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets, as available. The business purpose loans originated by American Business
Credit had an average loan-to-value ratio of 60.9% based solely on the real
estate collateral securing the loan for fiscal year 2000.
The maximum acceptable loan-to-value ratio for home equity loans held
as available for sale or securitized is generally 90%. The home equity loans
originated by the Consumer Mortgage Group had an average loan-to-value ratio of
s78.9% for fiscal year 2000. Occasionally, exceptions to these maximum
loan-to-value ratios are made if other collateral is available or if there are
other compensating factors. From time to time, the Consumer Mortgage Group makes
loans with loan-to-value ratios in excess of 90% which may be sold with
servicing released. Title insurance is generally obtained in connection with all
real estate secured loans.
New Jersey Mortgage generally does not lend more than 95% of the
appraised value in the case of conventional first mortgage loans, other than FHA
and VA loans. The conventional first mortgage loans originated by New Jersey
Mortgage had an average loan-to-value ratio of 83.7% for fiscal year 2000.
Private mortgage insurance on all conventional first mortgage loans with
loan-to-value ratios in excess of 80% is generally required at the time of
origination, further reducing New Jersey Mortgage's exposure. New Jersey
Mortgage obtains mortgage insurance certificates from the FHA on all FHA loans
and loan guaranty certificates from the VA on all VA loans regardless of the
loan-to-value ratio on the underlying loan amount.
In determining whether the mortgaged property is adequate as
collateral, the Originators appraise each property that is considered for
financing. The appraisal is completed by an independent qualified appraiser and
generally includes pictures of comparable properties and pictures of the
property securing the loan. With respect to business purpose loans, home equity
loans and conventional first mortgage loans, the appraisal is completed by an
independent qualified appraiser on a Fannie Mae form.
Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of borrower
default. Further, delinquencies, foreclosures and losses generally increase
during economic slowdowns or recessions. As a result, the originators cannot
assure that the market value of the real estate underlying the loans will at any
time be equal to or in excess of the outstanding principal amount of those
loans. Although the originators have expanded the geographic area in which they
originate loans, a downturn in the economy generally or in a specific region of
the country may have an effect on the originators' originations.
THE SERVICER
American Business Credit will be responsible for servicing the mortgage
loans in accordance with its established servicing procedures and the terms of
the Sale and Servicing Agreement. American Business Credit will contract with
Upland Mortgage and New Jersey Mortgage to act as subservicers with respect to
the servicing of the consumer purpose mortgage loans. Upland Mortgage and New
Jersey
S-21
<PAGE>
Mortgage follow the same servicing procedures described below with respect to
American Business Credit.
The servicer employs a large staff of experienced collectors and
supervisors working in shifts to manage non-performing loans. In addition,
several in-house collection attorneys and paralegals work closely with these
collectors and their managers to optimize collection efforts. The goal of the
servicer's labor-intensive collections program is to emphasize delinquency
prevention.
In servicing business purpose loans and home equity loans, the servicer
typically sends an invoice to borrowers on a monthly basis advising them of the
required payment and its due date. The collection process begins immediately
after a borrower fails to make a monthly payment. When a loan becomes 45 to 60
days delinquent, it is transferred to a workout specialist in the collections
department. The workout specialist tries to reinstate a delinquent loan, seek a
payoff, or occasionally enter into a modification agreement with a borrower to
avoid foreclosure. All proposed workout arrangements are evaluated on a
case-by-case basis, based upon the borrower's past credit history, current
financial status, level of cooperation, future prospects and the reasons for the
delinquency. If the loan becomes delinquent 61 days or more and a satisfactory
workout arrangement with the borrower is not achieved or the borrower declares
bankruptcy, the matter is immediately referred to the servicer's attorneys for
collection. Due to this timing, the foreclosure process on most delinquent loans
is commenced before the loan is 100 days past due.
The servicer believes that it is one of very few servicing entities
that has an in-house legal staff dedicated to the collection of delinquent loans
and the handling of bankruptcy cases. As a result, the servicer believes its
delinquent loans are reviewed from a legal perspective earlier in the collection
process than is the case with loans made by traditional lenders. This allows
troublesome legal issues, if any, to be noted and, if possible, resolved earlier
the servicer's in-house legal staff also attempts to find solutions for
delinquent loans, other than foreclosure. Every loan is analyzed to compare the
property value against the loan balance and solutions are presented to the
borrower based on the results of that analysis.
In those situations where foreclosures are handled by outside counsel,
the in-house legal staff manages outside counsel to ensure that the time period
for handling foreclosures meets or exceeds established industry standards.
Frequent contact between in-house and outside counsel insures that the process
moves quickly and efficiently in an attempt to achieve a timely and economical
resolution to contested matters. In managing these loans on a case by case basis
American Business Credit may advance funds to keep the first mortgage current or
may choose to pay off the senior mortgage. The servicer will also expend funds
to protect and preserve the property and to enhance the ability to sell a
recovered property.
Supporting American Business Credit's collection and accounting
functions is a network of computer hardware and software. American Business
Credit's current computer system produces mortgage loan invoices, payment
reminders and late notices. In addition to these collection functions, the
computer provides an in-depth customer contact system which enables American
Business Credit's collectors to manage each borrower's loan history by
individually logging all correspondence into the system's data base. The system
also generates numerous management reports detailing collection activity and
accounting information.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in American Business
Credit's, Upland Mortgage's and New Jersey
S-22
<PAGE>
Mortgage's servicing portfolio for the periods shown. The delinquency and loan
loss experience represents the historical experience of American Business
Credit, Upland Mortgage and New Jersey Mortgage, and there can be no assurance
that the future experience on the mortgage loans in the trust will be the same
as, or more favorable than, that of the mortgage loans in American Business
Credit's, Upland Mortgage's and New Jersey Mortgage's overall servicing
portfolio.
DELINQUENCY AND FORECLOSURE EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, 1998 At June 30, 1999 At June 30, 2000 At September 30, 2000
---------------- ---------------- ---------------- ---------------------
% of % of % of % of
Amount Amount Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio.......... $450,935 100.00% $ 1,007,738 100.00% $1,799,584 100.00% $2,026,855 100.00%
60+ days past due loans:
61-90 days................... $ 1,950 0.43% $ 4,624 0.46% $ 7,416 0.41% $ 8,343 0.41%
more than 90 days............ $ 7,103 1.58% $ 23,958 2.38% $ 38,962 2.17% $ 43,968 2.17%
---------- ----- ------------ ----- -------- ----- ---------- -----
Total 60+ days past due loans $ 9,053 2.01% $ 28,582 2.84% $ 46,378 2.58% $ 52,311 2.58%
REO Properties............... $ 922 0.20% $ 9,948 0.99% $ 13,122 0.73% $ 14,747 0.73%
---------- ----- ------------ ----- -------- ----- ---------- -----
Total 60+ days past due loans,
foreclosures pending and REO
Properties................... $ 9,975 2.21% $ 38,530 3.82% $ 59,500 3.31% $ 67,058 3.31%
=========== ===== ============ ===== ======== ===== ========== =====
</TABLE>
The preceding table was prepared using the following assumptions:
o the past due period is based on the actual number of days that a payment is
contractually past due; a loan as to which a monthly payment was due 61-90
days prior to the reporting period is considered 61-90 days past due, etc.
o total past due loans includes pending foreclosures, and
o an REO property is a property acquired and held as a result of foreclosure
or deed in lieu of foreclosure.
S-23
<PAGE>
LOAN CHARGE-OFF EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, At June 30, At June 30, At September 30,
1998 1999 2000 2000
---------------- ---- ---- ----
Amount Amount Amount Amount
Serviced Serviced Serviced Serviced
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Servicing portfolio.............................. $ 450,935 $ 1,007,738 $ 1,799,584 $ 2,026,855
Average outstanding.............................. $ 309,063 $ 729,337 $ 1,354,500 $ 1,903,250
Gross losses................................... $ 138 $ 820 $ 3,359 $ 2,268
Loan recoveries................................ $ 0 $ 3 $ 40 $ 3
----------- ----------- ----------- -----------
Net loan charge-offs........................... $ 138 $ 817 $ 3,319 $ 2,265
Net loan charge-offs as a
percentage of servicing
portfolio at period end..................... 0.03% 0.08% 0.18% 0.45%
===== ===== ===== =====
Net loan charge-offs as a
percentage of average
outstanding................................. 0.04% 0.11% 0.25% 0.48%
===== ===== ===== =====
</TABLE>
The preceding table was prepared using the following assumptions:
o "average outstanding" presented is the arithmetic average of the principal
balances of the loans in the originators' servicing portfolio outstanding at
the opening and closing of business for such period; and
o "gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans; and
o "net loan charge-offs as a percentage of servicing portfolio at period end"
and "net loan charge-offs as a percentage of average outstanding" for the
quarter ended at September 30, 2000 are annualized numbers.
The above delinquency, foreclosure and loan charge-off statistics
represent the servicer's recent experience and indicate notable increases during
fiscal year 2000 and the quarter ended September 30, 2000. The servicer believes
that this trend is a result of the maturation of its servicing portfolio rather
than a change in the credit quality of the mortgage loans that have been
originated recently. Furthermore, the statistical data in the tables is based on
all of the mortgage loans in the servicing portfolio. The mortgage loans in the
trust may have characteristics which distinguish them from the majority of the
mortgage loans in the servicing portfolio. Accordingly, such data should not be
considered to reflect the credit quality of the mortgage loans included in the
trust, or as a basis of assessing the likelihood, amount or severity of losses
on the mortgage loans included in the trust.
THE OWNER TRUSTEE
First Union Trust Company, National Association, a national banking
association, has its corporate trust offices located at One Rodney Square, 920
King Street, Suite 102, Wilmington, Delaware 19801. The owner trustee will
perform limited administrative functions on behalf of the trust pursuant to the
Trust Agreement. The owner trustee's duties are limited solely to its express
obligations under the Trust Agreement.
THE INDENTURE TRUSTEE AND THE COLLATERAL AGENT
The Chase Manhattan Bank, a New York banking corporation, has an office
at 450 West 33rd Street, 14th Floor, New York, New York 10001. The indenture
trustee will act as initial authenticating
S-24
<PAGE>
agent, paying agent and note registrar pursuant to the terms of the Indenture.
The collateral agent's duties are limited solely to its express obligations
under the Sale and Servicing Agreement.
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES
On the closing date, the trust will issue the notes pursuant to the
Indenture. The notes represent debt obligations of the trust secured by a pledge
of the trust estate. Pursuant to the Trust Agreement, the trust will also issue
one class of trust certificates representing the entire beneficial ownership
interest in the trust. There will be one trust certificate which will be held by
the seller. The trust certificates may not be transferred without the consent of
the note insurer and compliance with the transfer provisions of the Trust
Agreement.
The trust estate consists of,
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof collected
after the Cut-Off Date,
o such assets as from time to time are identified as REO property
and collections thereon and proceeds thereof,
o assets that are deposited in the accounts, and invested in
accordance with the Indenture and the Sale and Servicing
Agreement,
o the indenture trustee's rights with respect to the mortgage loans
under all insurance policies required to be maintained pursuant to
the Sale and Servicing Agreement and any insurance proceeds,
o Liquidation Proceeds, and
o released mortgaged property proceeds.
In addition, the seller will cause the note insurer to issue the policy
under which it will guarantee payments to the holders of the notes as described
herein.
The notes will be issued only in book-entry form, in denominations of
$1,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one note may be issued in a different amount. The notes are
available in book-entry form only, through the facilities of DTC. Voting rights
will be allocated among holders of the notes in accordance with their respective
percentage interests.
BOOK-ENTRY REGISTRATION
The notes are sometimes referred to in this prospectus supplement as
"book-entry notes." No person acquiring an interest in the book-entry notes will
be entitled to receive a definitive note representing an obligation of the
trust, except under the limited circumstances described herein. Beneficial
owners may elect to hold their interests through DTC, in the United States, or
Clearstream or the Euroclear System, in Europe. Transfers within DTC,
Clearstream 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
notes are book-entry notes, such notes will be evidenced by one or more notes
registered in the name of Cede & Co., which will be the "holder" of such notes,
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 Clearstream or
Euroclear, on the other, will be effected in DTC through Citibank, N.A., the
relevant depositories of Clearstream or Euroclear, respectively, and each a
participating member of DTC. The notes will initially be registered in the name
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<PAGE>
of Cede & Co. The interests of the holders of such notes will be represented by
book-entries on the records of DTC and participating members thereof. All
references herein to any notes reflect the rights of beneficial owners only as
such rights may be exercised through DTC and its participating organizations for
so long as such notes are held by DTC.
The beneficial owners of notes may elect to hold their notes through
DTC in the United States, or Clearstream or Euroclear if they are participants
in such systems, or indirectly through organizations which are participants in
such systems. The book-entry notes will be issued in one or more notes which in
the aggregate equal the outstanding principal balance of the notes and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream'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, N.A. will act as depositary for Clearstream
and The Chase Manhattan Bank will act as depositary for Euroclear. Investors may
hold such beneficial interests in the book-entry notes in minimum denominations
representing principal amounts of $1,000. Except as described below, no
beneficial owner will be entitled to receive a physical or definitive note
representing such note. Unless and until definitive notes are issued, it is
anticipated that the only "holder" of such notes will be Cede & Co., as nominee
of DTC. Beneficial owners will not be "holders" or "noteholders" as those terms
are used in the Indenture and the Sale and Servicing Agreement. Beneficial
owners are only permitted to exercise their rights indirectly through
participants and DTC.
The beneficial owner's ownership of a book-entry note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of such book-entry note
will be recorded on the records of DTC or on the records of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream or
Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of notes. Participants
include securities brokers and dealers, including the underwriters, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants".
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
notes, such as the notes, among participants on whose behalf it acts with
respect to the book-entry notes and to receive and transmit payments of
principal of and interest on the book-entry notes. Participants and indirect
participants with which beneficial owners have accounts with respect to the
book-entry notes similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective beneficial owners.
Beneficial owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, book-entry notes may do so only through participants and indirect
participants. In addition, beneficial owners will receive all payments of
principal and interest from the indenture trustee, or a paying agent on behalf
of the indenture trustee, through DTC participants. DTC will forward such
payments to its participants, which thereafter will forward them to
S-26
<PAGE>
indirect participants or beneficial owners. Beneficial owners will not be
recognized by the indenture trustee, the servicer or any paying agent as holders
of the notes, and beneficial owners will be permitted to exercise the rights of
the holders of the notes only indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the notes, see "Certain Federal Income Tax
Considerations" in the accompanying prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the relevant depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Clearstream
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Clearstream Banking, societe anonyme (formerly Cedelbank) is
incorporated under the laws of Luxembourg as a professional depository.
Clearstream holds securities for its participant organizations and facilitates
the clearance and settlement of securities transactions between Clearstream
participants through electronic book-entry changes in accounts of Clearstream
participants, thereby eliminating the need for physical movement of notes.
Transactions may be settled in Clearstream in any of 28 currencies, including
United States dollars. Clearstream provides to its Clearstream participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream interfaces with domestic markets in several countries. As
a professional depository, Clearstream is subject to regulation by the
Luxembourg Monetary Institute. Clearstream participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Clearstream is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of notes and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 31 currencies, including United States dollars. Euroclear includes
various other services, including securities lending
S-27
<PAGE>
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not Euroclear
Clearance. Euroclear Clearance establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear operator acts under the Terms and
Conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Payments on the book-entry notes will be made on each payment date by
the indenture trustee to Cede & Co., as nominee of DTC. DTC will be responsible
for crediting the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing such payment to the beneficial owners of the
book-entry notes that it represents and to each financial intermediary for which
it acts as agent. Each such financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry notes that it
represents.
Under a book-entry format, beneficial owners of the book-entry notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the indenture trustee to Cede & Co., as nominee of DTC. Payments
with respect to notes held through Clearstream or Euroclear will be credited to
the cash accounts of Clearstream participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry notes to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
book-entry notes, may be limited due to the lack of physical notes for such
book-entry notes. In addition, issuance of the book-entry notes in book-entry
form may reduce the liquidity of such notes in the secondary market since
certain potential investors may be unwilling to purchase notes for which they
cannot obtain physical notes.
Monthly and annual reports on the trust provided by the indenture
trustee to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC, and to the financial intermediaries to whose DTC
accounts the book-entry notes of such beneficial owners are credited.
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DTC has advised the depositor and the servicer that it will take any
action permitted to be taken by a holder of the notes under the Indenture only
at the direction of one or more participants to whose accounts with DTC the
book-entry notes are credited. Additionally, DTC has advised the depositor that
it will take such actions with respect to specified percentages of voting rights
only at the direction of and on behalf of participants whose holdings of
book-entry notes evidence such specified percentages of voting rights. DTC may
take conflicting actions with respect to percentages of voting rights to the
extent that participants whose holdings of book-entry notes evidence such
percentages of voting rights authorize divergent action.
None of the trust, the owner trustee, the depositor, the servicer, the
note insurer or the indenture trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the book-entry notes held by Cede & Co., as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
See "Risk Factors -- Book-Entry Registration" and "The Agreements -- Book-Entry
Securities" in the accompanying prospectus.
DEFINITIVE NOTES
The notes, which will be issued initially as book-entry notes, will be
converted to definitive notes and reissued to beneficial owners or their
nominees, rather than to DTC or its nominee, only if (a) DTC or the servicer
advises the indenture trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
book-entry notes and DTC or the servicer is unable to locate a qualified
successor or (b) the indenture trustee, at its option, elects to terminate the
book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive notes. Upon delivery of definitive notes, the
indenture trustee will reissue the book-entry notes as definitive notes to
beneficial owners. Payments of principal of, and interest on, the book-entry
notes will thereafter be made by the indenture trustee, or a paying agent on
behalf of the indenture trustee, directly to holders of definitive notes in
accordance with the procedures set forth in the Indenture.
Definitive notes will be transferable and exchangeable at the offices
of the indenture trustee or the note registrar. No service charge will be
imposed for any registration of transfer or exchange, but the indenture trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
ASSIGNMENT AND PLEDGE OF THE MORTGAGE LOANS
Pursuant to the Unaffiliated Seller's Agreement, the originators will
sell, transfer, assign, set over and otherwise convey the mortgage loans,
without recourse, to the seller and the seller will sell, transfer, assign, set
over and otherwise convey the mortgage loans, including all principal
outstanding as of, and interest due after, the Cut-Off Date, without recourse,
to the depositor on the closing date. Pursuant to the Sale and Servicing
Agreement, the depositor will sell, transfer, assign, set over and otherwise
convey without recourse to the trust, all right, title and interest in and to
each mortgage loan, including all principal outstanding as of, and interest due
after, the Cut-Off Date. Each such transfer will convey all right, title and
interest in and to (a) principal outstanding as of the Cut-Off Date, and (b)
interest due on
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each such mortgage loan after the Cut-Off Date; provided, however, that the
originators will not convey, and the originators reserve and retain all their
respective right, title and interest in and to (x) principal, including
principal prepayments in full and curtailments (i.e., partial prepayments),
received on each such mortgage loan on or prior to the Cut-Off Date and (y)
interest due on each mortgage loan on or prior to the Cut-Off Date.
Pursuant to the Indenture, the trust will pledge to the indenture
trustee in trust for the benefit of the holders of the notes and the note
insurer, all right, title and interest in and to each mortgage loan, including
all principal outstanding as of, and interest due after, the Cut-Off Date, as
collateral security for the notes.
DELIVERY OF MORTGAGE LOAN DOCUMENTS
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the trust will cause to be delivered to the
collateral agent, on behalf of the indenture trustee, on the closing date, the
following documents with respect to each mortgage loan which constitute the
mortgage file:
(a) the original mortgage note, endorsed without recourse in blank by
the related originator, including all intervening endorsements
showing a complete chain of endorsement;
(b) the related original mortgage with evidence of recording indicated
thereon or, in certain limited circumstances, a copy thereof
certified by the applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof certified
by the applicable recording office, if any, showing a complete
chain of assignment from the originator of the related mortgage
loan to the related originator -- which assignment may, at such
originator's option, be combined with the assignment referred to
in clause (d) below;
(d) a mortgage assignment in recordable form, which, if acceptable for
recording in the relevant jurisdiction, may be included in a
blanket assignment or assignments, of each mortgage from the
related originator to the indenture trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
mortgage or mortgage note have been modified or such mortgage or
mortgage note has been assumed; and
(f) an original title insurance policy or (x) a copy of the title
insurance policy, or (y) a binder thereof or copy of such binder
together with a certificate from the originator that the original
mortgage has been delivered to the title insurance company that
issued such binder for recordation.
Pursuant to the Sale and Servicing Agreement, the collateral agent, on
behalf of the indenture trustee, agrees to execute and deliver on or prior to
the closing date, an acknowledgment of receipt of the original mortgage note,
item (a) above, with respect to each of the mortgage loans, with any exceptions
noted. The collateral agent, on behalf of the indenture trustee, agrees, for the
benefit of the holders of the notes and the note insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date -- or,
with respect to any Qualified Substitute Mortgage Loan, within thirty days after
the receipt by the collateral agent thereof -- and to deliver a certification
generally to the effect that, as to each mortgage loan listed in the schedule of
mortgage loans,
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o all documents required to be delivered to it pursuant to the Sale
and Servicing Agreement are in its possession;
o each such document has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to such mortgage loan; and
o based on its examination and only as to the foregoing documents,
certain information set forth on the schedule of mortgage loans
accurately reflects the information set forth in the mortgage file
delivered on such date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of a mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage loan does not conform to the requirements above or to the
description thereof as set forth in the schedule of mortgage loans, the
collateral agent shall promptly so notify the indenture trustee, the servicer,
the seller and the note insurer in writing with details thereof. The seller
agrees to use reasonable efforts to cause to be remedied a material defect in a
document constituting part of a mortgage file of which it is so notified by the
collateral agent. If, however, within forty-five days after the collateral
agent's notice of such defect, the seller has not caused the defect to be
remedied and the defect materially and adversely affects the interest of the
holders of the notes or the interests of the note insurer in the mortgage loan,
the seller or the related originator will either (a) substitute in lieu of such
mortgage loan a Qualified Substitute Mortgage Loan and, if the then outstanding
principal balance of such Qualified Substitute Mortgage Loan is less than the
principal balance of such mortgage loan as of the date of such substitution plus
accrued and unpaid interest thereon, deliver to the servicer a substitution
adjustment equal to the amount of any such shortfall or (b) purchase such
mortgage loan at a price equal to the outstanding principal balance of such
mortgage loan as of the date of purchase, plus the greater of (x) all accrued
and unpaid interest thereon and (y) thirty days' interest thereon, computed at
the related mortgage interest rate, net of the servicing fee if the servicer is
effecting the repurchase, plus the amount of any unreimbursed servicing advances
made by the servicer, which purchase price shall be deposited in the payment
account on the next succeeding servicer remittance date after deducting
therefrom any amounts received in respect of such repurchased mortgage loan or
loans and being held in the payment account for future payment to the extent
such amounts have not yet been applied to principal or interest on such mortgage
loan. In addition, the seller and the originators shall be obligated to
indemnify the trust, the owner trustee, the indenture trustee, the collateral
agent, the holders of the notes and the note insurer for any third-party claims
arising out of a breach by the seller or the originators of representations or
warranties regarding the mortgage loans. The obligation of the seller and the
originators to cure such breach or to substitute or purchase any mortgage loan
and to indemnify constitute the sole remedies respecting a material breach of
any such representation or warranty to the holders of the notes, the indenture
trustee, the collateral agent and the note insurer.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The seller will represent, among other things, with respect to each
mortgage loan, as of the closing date, the following:
1. the information set forth in the schedule of mortgage loans with
respect to each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents related thereto, has been or
will be delivered to the collateral agent, on behalf of the indenture trustee,
on the closing date;
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3. the mortgaged property consists of a single parcel of real property
separately assessed for tax purposes, upon which is erected a detached or an
attached one-family residence or a detached two- to six-family dwelling, or an
individual condominium unit, or a townhouse, or a manufactured dwelling, or an
individual unit in a planned unit development, or a commercial property, or a
mixed use or a multiple purpose property, or a mobile home. Such residence,
dwelling or unit is not,
o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust, except to the extent such property is
mortgaged by a trustee duly qualified to serve as such in the
relevant jurisdiction,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage or deed of trust is a valid first or second lien on a
fee simple, or its equivalent under applicable state law, estate in the real
property securing the amount owed by the mortgagor under the mortgage note
subject only to,
o the lien of current real property taxes and assessments which are
not delinquent,
o any related first mortgage loan,
o covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of
such mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area
wherein the property subject to the mortgage is located or
specifically reflected in the appraisal obtained in connection
with the origination of the related mortgage loan obtained by the
seller, and
o other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security
intended to be provided by such mortgage;
5. to the best of the seller's knowledge none of the mortgage loans are
Section 32 loans subject to the Home Ownership and Equity Protection Act;
6. immediately prior to the transfer and assignment by the seller to
the depositor, the seller had good title to, and was the sole owner of each
mortgage loan, free of any interest of any other person, and the seller has
transferred all right, title and interest in each mortgage loan to the
depositor;
7. each mortgage loan conforms, and all such mortgage loans in the
aggregate conform, to the description thereof set forth in this prospectus
supplement; and
8. all of the mortgage loans were originated in accordance with the
underwriting criteria set forth in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the holder of the notes, the seller, the servicer, any subservicer, the note
insurer, the collateral agent or the indenture trustee that any of the
representations and warranties contained in the Sale and Servicing Agreement
have been breached in any material respect as of the closing date, with the
result that the interests of the holders of the notes in the related mortgage
loan or the interests of the note insurer were materially and adversely
affected, notwithstanding that such representation and warranty was made to the
seller's or the originator's
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best knowledge and the seller or the originator lacked knowledge of such breach,
the party discovering such breach is required to give prompt written notice to
the other parties. Subject to certain provisions of the Sale and Servicing
Agreement, within sixty days of the earlier to occur of the seller's or an
originator's discovery or its receipt of notice of any such breach, the seller
or the originators will,
o promptly cure such breach in all material respects,
o remove each mortgage loan which has given rise to the requirement
for action by the seller or the originators, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding
principal balance of such Qualified Substitute Mortgage Loans as
of the date of such substitution is less than the outstanding
principal balance, plus accrued and unpaid interest thereon, of
the replaced mortgage loans as of the date of substitution,
deliver to the trust as part of the amounts remitted by the
servicer on such payment date the amount of such shortfall, or
o purchase such mortgage loan at a price equal to the principal
balance of such mortgage loan as of the date of purchase plus the
greater of (x) all accrued and unpaid interest thereon and (y)
thirty days' interest thereon computed at the mortgage interest
rate, net of the servicing fee if American Business Credit is the
servicer, plus the amount of any unreimbursed servicing advances
made by the servicer,
and deposit such purchase price into the payment account on the next succeeding
servicer remittance date after deducting therefrom any amounts received in
respect of such repurchased mortgage loan or mortgage loans and being held in
the payment account for future payment to the extent such amounts have not yet
been applied to principal or interest on such mortgage loan.
In addition, the seller and the originators shall be obligated to
indemnify the trust, the depositor, the owner trustee, the indenture trustee,
the collateral agent, the holders of the notes and the note insurer for any
third-party claims arising out of a breach by the seller or the originators of
representations or warranties regarding the mortgage loans. The obligation of
the seller and the originators to cure such breach or to substitute or purchase
any mortgage loan and to indemnify constitute the sole remedies respecting a
material breach of any such representation or warranty to the holders of the
notes, the indenture trustee, the collateral agent and the note insurer.
PAYMENTS ON THE MORTGAGE LOANS
The Sale and Servicing Agreement provides that the servicer, for the
benefit of the holders of the notes, shall establish and maintain the collection
account, which will generally be (x) an account maintained with a depository
institution or trust company whose long term unsecured debt obligations are
rated by each rating agency in one of its two highest rating categories at the
time of any deposit therein or (y) trust accounts maintained with a depository
institution acceptable to each rating agency and the note insurer. The Sale and
Servicing Agreement permits the servicer to direct any depository institution
maintaining the collection account to invest the funds in the collection account
in one or more eligible investments that mature, unless payable on demand, no
later than the business day preceding the date on which the servicer is required
to transfer the servicer remittance amount from the collection account to the
payment account, as described below.
The servicer is obligated to deposit or cause to be deposited in the
collection account on each business day, amounts representing the following
payments received and collections made by it after the Cut-Off Date, other than
in respect of monthly payments on the mortgage loans due on each mortgage loan
up to and including any due date occurring on or prior to the Cut-Off Date:
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o all payments on account of principal, including prepayments of
principal;
o all payments on account of interest on the mortgage loans;
o all Liquidation Proceeds and all Insurance Proceeds to the extent
such proceeds are not to be applied to the restoration of the
related mortgaged property or released to the related borrower in
accordance with the express requirements of law or in accordance
with prudent and customary servicing practices;
o all Net REO Proceeds;
o all other amounts required to be deposited in the collection
account pursuant to the Sale and Servicing Agreement; and
o any amounts required to be deposited in connection with net losses
realized on investments of funds in the collection account.
The indenture trustee will be obligated to set up a payment account
with respect to the notes into which the servicer will deposit or cause to be
deposited the servicer remittance amount on the 10th day of each month, or if
such date is not a business day, then the preceding business day.
The servicer remittance amount for a servicer remittance date is equal
to the sum, without duplication, of,
o all collections of principal and interest on the mortgage loans,
including principal prepayments, Net REO Proceeds and Liquidation
Proceeds, if any, collected by the servicer during the prior
calendar month;
o all Periodic Advances made by the servicer with respect to
payments due to be received on the mortgage loans on the related
due date; and
o any other amounts required to be placed in the collection account
by the servicer pursuant to the Sale and Servicing Agreement,
but excluding the following:
(a) amounts received on a particular mortgage loan, with respect to
which the servicer has previously made an unreimbursed Periodic
Advance, as late payments of interest, or as Net Liquidation
Proceeds, to the extent of such unreimbursed Periodic Advance;
(b) amounts received on a particular mortgage loan with respect to
which the servicer has previously made an unreimbursed servicing
advance, to the extent of such unreimbursed servicing advance;
(c) for such servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investments that is held in the
collection account for the account or payment account of the
servicer;
(e) all amounts actually recovered from the servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
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(g) certain other amounts which are reimbursable to the servicer, as
provided in the Sale and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the servicer from the collection account on or prior to each servicer
remittance date.
OVER-COLLATERALIZATION PROVISIONS
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, starting with the first payment date, the Excess
Interest, if any, will be applied on each payment date as an accelerated payment
of principal on the notes, but only to the limited extent hereafter described.
The application of Excess Interest as a payment of principal has the effect of
accelerating the amortization of the notes relative to the amortization of the
mortgage loans. The Excess Interest will be used,
o to reimburse the note insurer for any amounts due to it;
o as a payment of principal to the notes until the payment date on
which the amount of over-collateralization has reached the
required level; or
o as needed to pay Net Mortgage Loan Interest Shortfalls.
The Indenture requires that, starting with the first payment date,
Excess Interest will be applied as an accelerated payment of principal on the
notes until the Over-collateralized Amount has increased to the level required
by the Indenture. After such time, if it is necessary to re-establish the
required level of over-collateralization, Excess Interest will again be applied
as an accelerated payment of principal on the notes. Initially, the
Over-collateralized Amount will be zero.
In the event that the required level of the Specified
Over-collateralized Amount is permitted to decrease or "step down" on a payment
date in the future, the Indenture provides that a portion of the principal which
would otherwise be paid to the holders of the notes on such payment date shall
instead be paid in the priority set forth herein under "--Flow of Funds." This
has the effect of decelerating the amortization of the notes relative to the
amortization of the mortgage loans, and of reducing the Over-collateralized
Amount. If, on any payment date, the Excess Over-collateralized Amount is, or,
after taking into account all other payments to be made on such payment date
would be, greater than zero -- i.e., the Over-collateralized Amount is or would
be greater than the Specified Over-collateralized Amount -- then certain amounts
relating to principal which would otherwise be paid to the holders of the notes
on such payment date shall instead be paid in the priority set forth herein
under "--Flow of Funds", in an amount equal to the Over-collateralization
Reduction Amount.
The Indenture provides that, on any payment date, all amounts collected
on account of principal -- other than any such amount applied to the payment of
an Over-collateralization Reduction Amount --during the prior calendar month
will be paid to the holders of the notes on such payment date. In addition, the
Sale and Servicing Agreement provides that the principal balance of any mortgage
loan which becomes a Liquidated Mortgage Loan shall then equal zero. The Sale
and Servicing Agreement does not contain any rule which requires that the amount
of any Liquidated Loan Loss be paid to the holders of the notes on the payment
date which immediately follows the event of loss; i.e., the Sale and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Liquidated Loan Loss will reduce the Over-collateralized Amount,
which, to the extent that such reduction causes the Over-collateralized Amount
to be less than the Specified Over-collateralized Amount applicable to the
related payment date, will require the payment of an Over-collateralization
Increase Amount on such payment date, or, if insufficient funds are available on
such payment date, on subsequent payment dates, until the Over-collateralized
Amount equals the Specified Over-collateralized Amount. The effect of the
foregoing is to allocate losses to the holders of the trust certificates by
reducing, or
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eliminating entirely, payments of Excess Interest and Over-collateralization
Reduction Amounts which such holder would otherwise receive.
Over-collateralization and the Policy. The Indenture requires the
indenture trustee to make a claim for an Insured Payment under the policy not
later than the third business day prior to any payment date as to which the
indenture trustee has determined that an Over-collateralization Deficit will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the holders of the notes on such payment date. The note
insurer has the option on any payment date to make a payment of principal,
including in respect of Liquidated Loan Losses, up to the amount that would have
been payable to the holders of the notes if sufficient funds were available
therefor. However, investors in the notes should realize that, under extreme
loss or delinquency scenarios, they may temporarily receive no payments of
principal.
FLOW OF FUNDS
On each payment date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to such payment date, shall make payments to the holders of the notes and
reimbursement to the note insurer under the Insurance Agreement, to the extent
of funds, including any Insured Payments, on deposit in the payment account, as
follows:
(a) to the indenture trustee, an amount equal to the fees then due to
it;
(b) from amounts then on deposit in the payment account, to the note
insurer the Premium Amount for such payment date;
(c) from amounts then on deposit in the payment account, the Interest
Payment Amount for the notes;
(d) from amounts then on deposit in the payment account, the Principal
Payment Amount for the notes, until the principal balance of the
notes is reduced to zero;
(e) from amounts then on deposit in the payment account, the
Reimbursement Amount for the notes;
(f) from amounts then on deposit in the payment account, the amount of
any Net Mortgage Loan Interest Shortfalls for the notes; and
(g) following the making by the indenture trustee of all allocations,
transfers and disbursements described above, to the holders of the
trust certificates, the amount remaining on such payment date in
the payment account, if any.
INDENTURE EVENTS OF DEFAULT
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the note insurer -- or the majority holders of the notes if the
note insurer is in default under the Insurance Agreement -- shall declare the
aggregate outstanding principal balance of all the notes to be due and payable
together with all accrued and unpaid interest thereon without presentment,
demand, protest or other notice of any kind, all of which are waived by the
trust. An event of default, wherever used herein, means any one of the following
events:
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1. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, on any payment date, all
or part of any Interest Payment Amount due on the notes on such payment date and
all or a part of any Net Mortgage Loan Interest Shortfalls due on the notes on
the maturity date of the notes; or
2. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, (x) on any payment date an
amount equal to the principal due on the outstanding notes on such payment date,
to the extent that sufficient funds are on deposit in the collection account or
(y) on the final stated maturity date for the notes, the aggregate outstanding
principal balance of the notes; or
3. the trust shall breach or default in the due observance of any one
or more of the negative covenants under the Indenture; or
4. the trust shall consent to the appointment of a custodian, receiver,
trustee or liquidator, or other similar official, of itself, or of a substantial
part of its property, or shall admit in writing its inability to pay its debts
generally as they come due, or a court of competent jurisdiction shall determine
that the trust is generally not paying its debts as they come due, or the trust
shall make a general assignment for the benefit of creditors; or
5. the trust shall file a voluntary petition in bankruptcy or a
voluntary petition or an answer seeking reorganization in a proceeding under any
bankruptcy laws, as now or hereafter in effect, or an answer admitting the
material allegation of a petition filed against the trust in any such
proceeding, or the trust shall, by voluntary petition, answer or consent, seek
relief under the provisions of any now existing or future bankruptcy or other
similar law providing for the reorganization or winding-up of debtors, or
providing for an agreement, composition, extension or adjustment with its
creditors; or
6. an order, judgment or decree shall be entered in any proceeding by
any court of competent jurisdiction appointing, without the consent, express or
legally implied, of the trust, a custodian, receiver, trustee or liquidator, or
other similar official, of the trust or any substantial part of its property, or
sequestering any substantial part of its respective property, and any such
order, judgment or decree or appointment or sequestration shall remain in force
undismissed, unstayed or unvacated for a period of ninety days after the date of
entry thereof; or
7. a petition against the trust in a proceeding under applicable
bankruptcy laws or other insolvency laws, as now or hereafter in effect, shall
be filed and shall not be stayed, withdrawn or dismissed within ninety days
thereafter, or if, under the provisions of any law providing for reorganization
or winding-up of debtors which may apply to the trust, any court of competent
jurisdiction shall assume jurisdiction, custody or control of the trust or any
substantial part of its property, and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated for a period of
ninety days.
REPORTS TO NOTEHOLDERS
Pursuant to the Indenture, on each payment date the indenture trustee
will deliver to the depositor and each holder of a note or a trust certificate a
written remittance report, provided to the indenture trustee and the note
insurer by the servicer, containing information, including, without limitation,
the amount of the payment on such payment date, the amount of such payment
allocable to principal and allocable to interest, the aggregate outstanding
principal balance of the notes as of such payment date, the amount of any
Insured Payment included in such payment on such payment date and such other
information as required by the Indenture.
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AMENDMENT
The Indenture may be amended from time to time by the trust and the
indenture trustee by written agreement, upon the prior written consent of the
note insurer, without notice to, or consent of, the holder of the notes, to cure
any ambiguity, to correct or supplement any provisions herein, to comply with
any changes in the Code, or to make any other provisions with respect to matters
or questions arising under the Indenture which shall not be inconsistent with
the provisions of the Indenture; provided, that such action shall not, as
evidenced by (i) an opinion of counsel delivered to, but not obtained at the
expense of, the indenture trustee or (ii) a letter from each rating agency
confirming that such amendment will not cause the reduction, qualification or
withdrawal of the then-current ratings of the notes, adversely affect in any
material respect the interests of any holder of the notes; provided, further,
that no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on mortgage loans which are required to be paid on
any note without the consent of the holder of such note, or change the rights or
obligations of any other party to the Indenture without the consent of such
party.
The Indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the notes and the trust certificates for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of the holders; provided, however, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, payments received on mortgage
loans which are required to be paid on any note without the consent of the
holder of such note or reduce the percentage of the notes whose holders are
required to consent to any such amendment without the consent of the holders of
100% of the notes.
The Unaffiliated Seller's Agreement and the Sale and Servicing
Agreement contain substantially similar restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
American Business Credit will act as the servicer of the mortgage
loans. Upland Mortgage and New Jersey Mortgage will act as subservicers with
respect to a portion of the mortgage loans. See "The Originators, the Seller,
the Servicer and the Subservicer" herein. The servicer and the subservicers will
be required to use the same care as they customarily employ in servicing and
administering mortgage loans for their own account, in accordance with accepted
mortgage servicing practices of prudent lending institutions, and giving due
consideration to the reliance of the note insurer and the holders of the notes
on them.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as servicer under the Sale and
Servicing Agreement, the servicer shall be entitled with respect to each
mortgage loan to the servicing fee, which shall be payable monthly from amounts
on deposit in the collection account. The servicing fee shall be an amount equal
to interest at one-twelfth of the servicing fee rate for such mortgage loan on
the outstanding principal balance of such mortgage loan. The servicing fee rate
with respect to each mortgage loan will be 0.70% per annum. In addition, the
servicer shall be entitled to receive, as additional servicing compensation, to
the extent permitted by applicable law and the related mortgage notes, any late
payment charges, assumption fees, prepayment fees or similar items. The servicer
shall also be entitled to withdraw from the collection account any net interest
or other income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Sale and
Servicing Agreement and shall not be entitled to reimbursement therefor except
as specifically provided in the Sale and Servicing Agreement.
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PERIODIC ADVANCES AND SERVICER ADVANCES
Periodic Advances. The servicer is required to make Periodic Advances
on each servicer remittance date, subject to the servicer's determination that
such advance would be recoverable. Such Periodic Advances by the servicer are
reimbursable to the servicer subject to certain conditions and restrictions, and
are intended to provide both sufficient funds for the payment of interest to the
holders of the notes, plus an additional amount intended to maintain a specified
level of over-collateralization and to pay the indenture trustee's fees, and the
premium due the note insurer. Notwithstanding the servicer's good faith
determination that a Periodic Advance was recoverable when made, if such
Periodic Advance becomes a nonrecoverable advance, the servicer will be entitled
to reimbursement therefor from the trust estate. See "Description of the Notes
-- Payments on the Mortgage Loans" herein.
Servicing Advances. The servicer is required to advance amounts with
respect to the mortgage loans, subject to the servicer's determination that such
advance would be recoverable and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related mortgage loan, constituting
"out-of-pocket" costs and expenses relating to,
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a first
lien not included in the trust estate on the mortgaged property,
and
o certain other customary amounts described in the Sale and
Servicing Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to certain conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time such
servicing advance was made, that it would be recoverable, such servicing advance
becomes a nonrecoverable advance, the servicer will be entitled to reimbursement
therefor from the trust estate.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Sale and Servicing Agreement
or, if not recovered from the mortgagor on whose behalf such servicing advance
or Periodic Advance was made, from late collections on the related mortgage
loan, including Liquidation Proceeds, Insurance Proceeds and such other amounts
as may be collected by the servicer from the mortgagor or otherwise relating to
the mortgage loan. In the event a Periodic Advance or a servicing advance
becomes a nonrecoverable advance, the servicer may be reimbursed for such
advance from the payment account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer, such Periodic
Advance or servicing advance would not ultimately be recoverable.
PREPAYMENT INTEREST SHORTFALLS
Not later than the close of business on the 10th day of each month, the
servicer is required to remit to the indenture trustee a payment of Compensating
Interest in respect of Prepayment Interest Shortfalls and shall not have the
right to reimbursement therefor. Insured Payments do not cover Prepayment
Interest Shortfalls.
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RELIEF ACT SHORTFALLS
The reduction, if any, in interest payable on the mortgage loans
attributable to the application of the Soldiers' and Sailors' Civil Relief Act
of 1940 will not reduce the amount of Current Interest due to the holders of the
notes. However, in the event the full amount of Current Interest is not
available on any payment date due to Relief Act Shortfalls, the amount of such
shortfall will not be covered by the policy. Such shortfalls in Current Interest
will be paid from the Excess Interest, if any, otherwise payable to the holders
of the trust certificates.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The seller, or any affiliate of the seller, has the option, but is not
obligated, to purchase from the trust any mortgage loan ninety days or more
delinquent at a purchase price equal to the outstanding principal balance
thereof as of the date of purchase, plus all accrued and unpaid interest on such
principal balance, computed at the related mortgage interest rate -- net of the
related servicing fee, if American Business Credit is the servicer -- plus the
amount of any unreimbursed Periodic Advances and servicing advances made by the
servicer with respect to such mortgage loan in accordance with the provisions
specified in the Sale and Servicing Agreement. However, after the seller or its
affiliates have purchased delinquent mortgage loans with an aggregate principal
balance of more than 2% of the aggregate original principal balance of the
mortgage loans held by the trust on the closing date, then, notwithstanding the
foregoing, unless the note insurer consents, the seller or its affiliates can
only purchase the mortgage loan or loans that have been delinquent for the
longest period of time, until the seller or its affiliates have purchased
delinquent mortgage loans with an aggregate principal balance equal to 5% of the
aggregate original principal balance of the mortgage loans held by the trust on
the closing date. Thereafter, the seller and its affiliates may only purchase
delinquent mortgage loans with the prior consent of the note insurer.
SERVICER REPORTS
On each servicer remittance date, the servicer is required to deliver
to the note insurer, the indenture trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the indenture
trustee to make the payments set forth under "--Flow of Funds" herein and
containing the information to be included in the written remittance report for
such payment date delivered by the indenture trustee.
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent and the rating agencies, not later than April 30th
of each year, starting in 2002, an officer's certificate stating that,
o the servicer has fully complied with the servicing provisions of
the Sale and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Sale and Servicing
Agreement has been made under such officer's supervision, and
o to the best of such officer's knowledge, based on such review, the
servicer has fulfilled all its obligations under the Sale and
Servicing Agreement for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such
default known to such officer and the nature and status thereof
including the steps being taken by the servicer to remedy such
default.
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Not later than April 30th of each year, starting in 2002, the servicer,
at its expense, is required to cause to be delivered to the note insurer, the
indenture trustee, the collateral agent, and the rating agencies from a firm of
independent certified public accountants, who may also render other services to
the servicer, a statement to the effect that such firm has examined certain
documents and records relating to the servicing of the mortgage loans during the
preceding calendar year, or such longer period from the closing date to the end
of the following calendar year, and that, on the basis of such examination
conducted substantially in compliance with generally accepted auditing standards
and the requirements of the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for Freddie Mac, such
servicing has been conducted in compliance with the Sale and Servicing Agreement
except for such significant exceptions or errors in records that, in the opinion
of such firm, generally accepted auditing standards and the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for Freddie Mac require it to report, in which case such exceptions and
errors shall be so reported.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Sale and Servicing Agreement, follow such collection procedures as it
follows with respect to loans held for its own account which are comparable to
the mortgage loans. Consistent with the above, the servicer may, in its
discretion, waive any late payment charge and arrange with a mortgagor a
schedule for the liquidation of delinquencies, subject to the provisions of the
Sale and Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a "due-on-sale"
clause, the servicer may enter into an assumption and modification 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 note.
Any fee collected by the servicer for entering into an assumption
agreement will be retained by the servicer as additional servicing compensation.
In connection with any such assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Certain Legal Aspects of the Loans -- Due-on-Sale
Clauses in Mortgage Loans" in the accompanying prospectus.
HAZARD INSURANCE
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such mortgaged property or (b) the principal balance of such mortgage
loan plus the outstanding balance of any mortgage loan senior to such mortgage
loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the payment account. The ability of the servicer to
assure that hazard insurance proceeds are appropriately applied may be dependent
on its being named as an additional insured under any hazard insurance policy,
or upon the extent to which information in this regard is furnished to the
servicer by a borrower. The Sale and Servicing Agreement provides that the
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servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy issued by an insurer acceptable to the rating
agencies insuring against losses on the mortgage loans. If such blanket policy
contains a deductible clause, the servicer is obligated to deposit in the
payment account the sums which would have been deposited therein but for such
clause.
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 and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-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.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the 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 generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(x) the replacement cost of the improvements less physical depreciation or (y)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the mortgage loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, 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 the servicer's general
loan servicing activities and the Sale and Servicing Agreement; provided, that
the servicer will not expend its own funds in connection with foreclosure or
other conversion, correction of a default on a senior mortgage or restoration of
any property unless the servicer believes such foreclosure, correction or
restoration will increase Net Liquidation Proceeds.
REMOVAL AND RESIGNATION OF THE SERVICER
The note insurer may, pursuant to the Sale and Servicing Agreement,
remove the servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clauses (g), (h) or (i) below and the
indenture trustee shall, at the direction of the note insurer, or may, at the
direction of the majority holders of the notes, with the consent of the note
insurer, in the case of any direction of the majority holders of the notes,
remove the servicer upon the occurrence and continuation beyond the
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applicable cure period of an event described in clause (a), (b), (c), (d), (e)
or (f) below. Each of the following constitutes a "servicer event of default":
(a) any failure by the servicer to remit to the indenture trustee any
payment required to be made by the servicer under the terms of the
Sale and Servicing Agreement, other than servicing advances
covered by clause (b) below, which continues unremedied for one
business day after the date upon which written notice of such
failure, requiring the same to be remedied, shall have been given
to the servicer and the note insurer by the indenture trustee or
to the servicer and the indenture trustee by the note insurer or
the holders of notes evidencing percentage interests of at least
25%; or
(b) the failure by the servicer to make any required servicing advance
which failure continues unremedied for a period of thirty days
after the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the servicer by
the indenture trustee or to the servicer and the indenture trustee
by any holder of a note or the note insurer; or
(c) any failure on the part of the servicer duly to observe or perform
in any material respect any other of the covenants or agreements
on the part of the servicer contained in the Sale and Servicing
Agreement, or the failure of any representation and warranty set
forth in the Sale and Servicing Agreement, which continues
unremedied for a period of thirty days after the date on which
written notice of such failure, requiring the same to be remedied,
shall have been given to the servicer by the indenture trustee, or
to the servicer and the indenture trustee by any holder of a note
or the note insurer; or
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or
future federal or state bankruptcy, insolvency or similar law or
for the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the
servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of ninety days; or
(e) the servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the servicer or of or relating to all or substantially
all of the servicer's property; or
(f) the servicer shall admit in writing its inability generally to pay
its debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations; or
(g) the delinquency or loss experience of the mortgage loans exceeds
certain levels specified in the Sale and Servicing Agreement; or
(h) the note insurer shall notify the indenture trustee of any "event
of default" under the Insurance Agreement; or
(i) the occurrence of an event of default under the Indenture.
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Except to permit New Jersey Mortgage and Upland Mortgage to act as
subservicers, the servicer may not assign its obligations under the Sale and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, American Business Credit, if
American Business Credit is not the servicer, the note insurer, the collateral
agent and the indenture trustee, or upon the determination that the servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the servicer without the incurrence, in the
reasonable judgment of the note insurer, of unreasonable expense. No such
resignation shall become effective until a successor has assumed the servicer's
responsibilities and obligations in accordance with the Sale and Servicing
Agreement.
Upon removal or resignation of the servicer, the indenture trustee will
be the successor servicer. The indenture trustee, as successor servicer, will be
obligated to make Periodic Advances and servicing advances and certain other
advances unless it determines reasonably and in good faith that such advances
would not be recoverable. If, however, the indenture trustee is unwilling or
unable to act as successor servicer, or if the majority holders of the notes,
with the consent of the note insurer, or the note insurer so requests, the
indenture trustee shall appoint, or petition a court of competent jurisdiction
to appoint, in accordance with the provisions of the Sale and Servicing
Agreement and subject to the approval of the note insurer, any established
mortgage loan servicing institution acceptable to the note insurer having a net
worth of not less than $15,000,000 as the successor servicer in the assumption
of all or any part of the responsibilities, duties or liabilities of the
servicer.
The indenture trustee and any other successor servicer in such capacity
is entitled to the same reimbursement for advances and no more than the same
servicing compensation as the servicer. See "--Servicing and Other Compensation
and Payment of Expenses" herein.
OPTIONAL CLEAN-UP CALL ON THE NOTES
The majority holder of the trust certificates may, at its option, call
the notes on the Clean-up Call Date by depositing an amount equal to the
aggregate outstanding principal balance of the mortgage loans on such payment
date, plus accrued and unpaid interest thereon, into the payment account. If
such holder does not exercise its right to call the notes on the Clean-up Call
Date, then the servicer will have the right to call the notes by depositing into
the payment account the amounts set forth in the preceding sentence. The note
insurer must consent to the call on the notes if the call would result in a draw
under the policy.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Indenture will terminate upon notice to the indenture trustee of
either: (a) the later of the payment to noteholders of the final payment or
collection with respect to the last mortgage loan, or Periodic Advances of same
by the servicer, or the disposition of all funds with respect to the last
mortgage loan and the remittance of all funds due under the Indenture and the
payment of all amounts due and payable to the note insurer, the collateral agent
and the indenture trustee or (b) mutual consent of the servicer, the note
insurer and all holders in writing; provided, however, that in no event will the
trust terminate later than twenty-one years after the death of the last
surviving lineal descendant of the person named in the Trust Agreement.
THE POLICY
The note insurer will issue a financial guaranty insurance policy for
the notes. This policy unconditionally guarantees the payment of Insured Amounts
and Preference Amounts on the notes. The note insurer will make each required
Insured Payment to the indenture trustee on the later of (1) the payment date
the Insured Payment is distributable to the holders under the indenture, and (2)
the next
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business day following the business day the note insurer shall have received
telephonic or telegraphic notice, subsequently confirmed in writing, or written
notice by registered or certified mail, from the indenture trustee, specifying
that an Insured Payment is due in accordance with the terms of the policy.
The note insurer's obligation under the policy will be discharged to
the extent that funds are received by the indenture trustee for distribution to
the holders, whether or not those funds are properly distributed by the
indenture trustee.
For purposes of the policy, a holder as to a particular note, does not
and may not include the trust, the servicer, the seller or the originators.
The note insurer only insures the timely receipt of interest on the
notes, calculated at the Class A Note Rate, the amount of any
Over-collateralization Deficit, payable on each payment date on the notes and
the principal balance of the notes on the final payment date. The policy will
not cover the Net Mortgage Loan Interest Shortfalls, nor does the policy
guarantee to the holders of the notes any particular rate of principal payment.
The policy expires and terminates without any action on the part of the note
insurer or any other person on the date that is one year and one day following
the date the notes have been paid in full.
In the absence of payments under the policy, holders will directly bear
the credit risks associated with their notes.
The policy is non-cancelable.
The policy is issued under and shall be construed under, the laws of
the State of New York, without giving effect to the conflict of laws principles
of the State of New York.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
DRAWINGS UNDER THE POLICY
Not later than three business days prior to each payment date, the
indenture trustee is required to determine, pursuant to the indenture, for the
next payment date, the Net Available Amount to be on deposit in each payment
account on that payment date. If there is a Deficiency Amount for a payment
date, the indenture trustee is required to complete, pursuant to the indenture,
a telephone or telegraphic notice, promptly confirmed in writing by telecopy
substantially in the form of Exhibit A to the policy, the original of which is
subsequently delivered by registered or certified mail, and submit the notice to
the note insurer no later than 12:00 noon New York City time on the second
business day preceding the payment date as a claim for an Insured Payment in an
amount equal to the Deficiency Amount.
THE NOTE INSURER
The following information has been obtained from Ambac Assurance
Corporation, the note insurer, for inclusion in this prospectus supplement. No
representation is made by the seller, the originators, the servicer, the
depositor, the trust, the owner trustee or the underwriters or any of their
affiliates as to the accuracy or completeness of the information.
The note insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The note insurer
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primarily insures newly issued municipal and structured finance obligations. The
note insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC Inc.), a 100% publicly-held company. Moody's Investors Service,
Inc., Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and Fitch, Inc. have each assigned a triple-A financial strength
rating to the note insurer.
The consolidated financial statements of the note insurer and
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. -- which was filed with the Securities
and Exchange Commission on March 30, 2000; Securities and Exchange Commission
File No. 1-10777 -- and the unaudited consolidated financial statements of the
note insurer and subsidiaries as of September 30, 2000 and for the periods
ending September 30, 2000 and September 30, 1999, included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended
September 30, 2000 -- which was filed with the Securities and Exchange
Commission on November 13, 2000 -- are incorporated by reference into this
prospectus supplement and are deemed to constitute a part of this prospectus
supplement. Any statement contained in a document incorporated by reference
shall be modified or superseded for the purposes of this prospectus supplement
to the extent that a statement contained by reference in this prospectus
supplement also modifies or supersedes that statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the note insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the notes are deemed
to be incorporated by reference into this prospectus supplement and to be a part
of this prospectus supplement from the respective dates of filing of the
financial statements.
The following table sets forth the capitalization of the note insurer
as of December 31, 1998, December 31, 1999 and September 30, 2000, respectively,
in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
Unearned premiums.............................. $ 1,303 $ 1,442 $ 1,508
Other liabilities.............................. 548 524 479
---------- ---------- ---------
Total liabilities.............................. $ 1,851 $ 1,966 $ 1,987
========== ========== =========
Stockholder's equity:
Common stock................................ $ 82 $ 82 $ 82
Additional paid-in capital.................. 541 752 757
Accumulated other comprehensive income (loss) 138 (92) (17)
Retained earnings........................... 1,405 1,674 1,915
---------- ---------- ---------
Total stockholder's equity..................... 2,166 2,416 2,737
---------- ---------- ---------
Total liabilities and stockholder's equity..... $ 4,017 $ 4,382 $ 4,724
========== ========== =========
</TABLE>
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For additional financial information concerning the note insurer, see
the audited financial statements of the note insurer incorporated by reference
in this prospectus supplement. Copies of the financial statements of the note
insurer incorporated by reference in this prospectus supplement and copies of
the note insurer's annual statement for the year ended December 31, 1999
prepared in accordance with statutory accounting standards are available,
without charge, from the note insurer. The address of the note insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The note insurer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the note insurer and presented under the
headings "The Note Insurer" and "The Policy" in this prospectus supplement and
in the financial statements incorporated in this prospectus supplement by
reference.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a note will be directly related to the rate of payment of
principal of the mortgage loans, including for this purpose voluntary payment in
full of mortgage loans prior to stated maturity, liquidations due to defaults,
casualties and condemnations, and repurchases of or substitutions for mortgage
loans by American Business Credit or an affiliate of American Business Credit as
required or permitted under the Indenture, the Sale and Servicing Agreement or
the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates of certain mortgage loans at
the time of origination, such mortgage loans may be subject to higher prepayment
rates than if prevailing rates remain at or above those at the time such
mortgage loans were originated. Conversely, if prevailing interest rates rise
appreciably above the interest rates of certain mortgage loans at the time of
origination, such mortgage loans may experience a lower prepayment rate than if
prevailing rates remain at or below those at the time such mortgage loans were
originated. However, there can be no assurance that the mortgage loans will
conform to the prepayment experience of conventional mortgage loans or to any
past prepayment experience or any published prepayment forecast. No assurance
can be given as to the level of prepayments that the mortgage loans in the trust
estate will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a note will be affected by the rate of the payment of principal on
the mortgage loans. If the actual rate of payments on the mortgage loans is
slower than the rate anticipated by an investor who purchases a note at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the mortgage loans is
faster than the rate anticipated by an investor who purchases a note at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield.
The final stated maturity date is expected to be December 15, 2031 for
the notes. The final stated maturity date was calculated using the assumption
that the final stated maturity date is twelve months
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after the final stated maturity date of the mortgage loan having the latest
maturity date. The weighted average life of the notes is likely to be shorter
than would be the case if payments actually made on the mortgage loans conformed
to the foregoing assumptions, and the final payment date with respect to the
notes could occur significantly earlier than the final stated maturity date
because:
o prepayments, including, for this purpose, prepayments attributable
to foreclosure, liquidation, repurchase and the like, on mortgage
loans are likely to occur;
o twelve months have been added to obtain the final stated maturity
date above;
o the over-collateralization provisions of the transaction result in
the application of Excess Interest to the payment of principal;
and
o the majority holder of the trust certificates or, if such majority
holder elects not to do so, the servicer may, at its respective
option as described herein, call the notes when the aggregate
outstanding principal balance of the mortgage loans is equal to or
less than 10% of the aggregate original principal balance of the
mortgage loans as of Cut-Off Date.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the notes will be influenced by the rate at which principal of the
related mortgage loans is paid, which may be in the form of scheduled
amortization or prepayments -- for this purpose, the term "prepayment" includes
liquidations due to default.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment model used in this prospectus
supplement, Home Equity Prepayment, or HEP, is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. For example, 23% HEP assumes a constant prepayment rate of 2.3%
per annum of the then outstanding principal balance of the mortgage loans in the
first month of the life of the mortgage loans and an additional 2.3% per annum
in each month thereafter up to and including the tenth month. Beginning in the
tenth month and in each month thereafter during the life of the mortgage loans,
23% HEP assumes a constant prepayment rate of 23% per annum. As used in the
table below, 0% prepayment assumption assumes prepayment rates equal to 0% of
the prepayment assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. The prepayment assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the mortgage
loans in the trust estate.
The following tables, addressing the weighted average lives of the
notes, have been prepared on the basis of the following modeling assumptions:
o the mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o payments on the notes are received in cash on the 15th day of each
month commencing in January 2001,
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payment by the mortgagors of principal
and interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the first day of
each month commencing in December 2000, and prepayments represent
payments in full of individual mortgage loans and are assumed to
be received on the last day of each month, commencing in December
2000, and include thirty days' interest thereon,
o the notes are purchased on December 21, 2000,
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o the Specified Over-collateralized Amount is as set forth in the
Indenture, and
o the mortgage loans consist of 6 mortgage loans having the
following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Mortgage Original Remaining Remaining Term
Mortgage Loan Principal Interest Interest Amortizing Term Amortizing Term to Maturity
Number Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
------ ----------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 110,386,170.66 12.060 11.360 336 335 205
2 7,826,402.18 13.194 12.494 110 109 109
3 23,723,964.91 13.313 12.613 179 179 179
4 34,769,995.61 11.920 11.220 239 238 238
5 1,638,774.79 11.127 10.427 295 294 294
6 61,649,875.25 11.395 10.695 360 359 359
</TABLE>
The foregoing modeling assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below
indicate the weighted average life and earliest retirement date of the notes
assuming that the related mortgage loans prepay according to the indicated
percentages of the prepayment assumption.
WEIGHTED AVERAGE LIVES
<TABLE>
<CAPTION>
Class A Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
---------------- ------------- ---------------
<S> <C> <C>
0% 15.01 10/15/2026
15% 4.97 9/15/2013
20% 3.84 10/15/2010
23% 3.36 7/15/2009
30% 2.60 7/15/2007
35% 2.23 7/15/2006
</TABLE>
The preceding table was prepared using the following assumptions:
o the weighted average life of the notes is determined by (a)
multiplying the amount of each principal payment used to retire
the notes by the number of years from the closing date to the date
on which such principal payment is received; (b) adding the
results; and (c) dividing the sum by the original principal
balance of the notes, and
o the notes are called on the first payment date on which the
aggregate outstanding principal balance of all the then
outstanding mortgage loans is equal to or less than 10% of the
aggregate original principal balances of the mortgage loans as of
the Cut-Off Date.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
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<PAGE>
The Indenture provides that none of the note insurer, the trust, the
owner trustee, the indenture trustee, the seller, the depositor, the originators
or the servicer will be liable to any holder for any loss or damage incurred by
such holder as a result of any difference in the rate of return received by such
holder as compared to the Class A Note Rate, with respect to any holder of notes
upon reinvestment of the funds received in connection with any premature
repayment of principal on the notes, including any such repayment resulting from
any prepayment by the mortgagor, any liquidation of such mortgage loan, or any
repurchase of or substitution for any mortgage loan by the depositor or the
servicer.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the notes is to be
considered only in connection with "Certain Federal Income Tax Considerations"
in the accompanying prospectus. The discussion herein and in the accompanying
prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the accompanying
prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the notes.
TREATMENT OF THE NOTES
The originators, the seller, the depositor and the trust agree, and the
holders of the notes will agree by their purchase of the notes, to treat the
notes as indebtedness for all federal, state and local income tax purposes.
There are no regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the notes. In general, whether instruments such as the
notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance of
the instruments and the transaction pursuant to which they are issued rather
than merely upon the form of the transaction or the manner in which the
instruments are labeled. The IRS and the courts have set forth various factors
to be taken into account in determining, for federal income tax purposes,
whether an instrument constitutes indebtedness and whether a transfer of
property is a sale because the transferor has relinquished substantial incidents
of ownership in the property or whether such transfer is a borrowing secured by
the property. On the basis of its analysis of such factors as applied to the
facts and its analysis of the economic substance of the contemplated
transaction, Morgan, Lewis & Bockius LLP, special tax counsel to the depositor,
is of the opinion that, for federal income tax purposes, (i) the notes will be
treated as indebtedness and (ii) the trust will not be classified as an
association or as a publicly traded partnership taxable as a corporation or as a
taxable mortgage pool. See "Certain Federal Income Tax Considerations --
Taxation of Debt Securities" in the accompanying prospectus.
If the notes are characterized as indebtedness, interest paid or
accrued on a note will be treated as ordinary income to holders of the notes and
principal payments on a note will be treated as a return of capital to the
extent of the holder's basis in the note allocable thereto. An accrual method
taxpayer will be required to include in income interest on the notes when
earned, even if not paid, unless it is determined to be uncollectible. The
indenture trustee, on behalf of the trust, will report to the holders of the
notes of record and the IRS the amount of interest paid and original issue
discount, if any, accrued on the notes to the extent required by law.
Possible Alternative Characterizations of the Notes. Although, as
described above, it is the opinion of special tax counsel that for federal
income tax purposes, the notes will be characterized as indebtedness, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the notes
did not represent debt for
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federal income tax purposes, holders of the notes would likely be treated as
owning an interest in a partnership and not an interest in an association, or a
publicly traded partnership, taxable as a corporation or a taxable mortgage
pool. If the holders of the notes were treated as owning an equitable interest
in a partnership, the partnership itself would not be subject to federal income
tax; rather each partner would be taxed individually on such partner's
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deduction for a holder of a note would differ if the notes were held
to constitute partnership interests, rather than indebtedness. Since the parties
will treat the notes as indebtedness for federal income tax purposes, none of
the servicer, the indenture trustee or the owner trustee will attempt to satisfy
the tax reporting requirements that would apply under this alternative
characterization of the notes. Investors that are foreign persons are strongly
advised to consult their own tax advisors in determining the federal, state,
local and other tax consequences to them of the purchase, ownership and
disposition of the notes.
Special Tax Attributes. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ... secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code.
Discount and Premium. It is not anticipated that the notes will be
issued with any original issue discount. See "Certain Federal Income Tax
Considerations-- Taxation of Debt Securities -- Interest and Acquisition
Discount" in the accompanying prospectus. The prepayment assumption that will be
used for purposes of computing original issue discount, if any, for federal
income tax purposes is 23% HEP. See "Prepayment and Yield Considerations" in
this prospectus supplement. In addition, a subsequent purchaser who buys a note
for less than its principal amount may be subject to the "market discount" rules
of the Code. See "Certain Federal Income Tax Considerations -- Taxation of Debt
Securities -- Market Discount" in the accompanying prospectus. A subsequent
purchaser who buys a note for more than its principal amount may be subject to
the "market premium" rules of the Code. See "Certain Federal Income Tax
Considerations -- Taxation of Debt Securities -- Premium" in the accompanying
prospectus.
Sale or Redemption of the Notes. If a note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such holder's adjusted basis in the note. See "Certain
Federal Income Tax Considerations -- Sale or Other Disposition" in the
accompanying prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Certain Federal Income Tax Considerations
-- Tax Consequences to Holders of the Notes" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on:
o employee benefit plans, as defined in Section 3(3) of ERISA,
o plans described in Section 4975(e)(1) of the Code, including
individual retirement accounts and Keogh plans,
o any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities and
o persons who have certain specified relationships to such plans --
"parties-in-interest" under ERISA and "disqualified persons" under
the Code.
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<PAGE>
Section 406 of ERISA prohibits plans from engaging in certain
transactions involving the assets of such plans with parties-in-interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and parties-in-interest, or disqualified persons, that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and disqualified persons with respect to such
arrangements and plans, may be subject to excise taxes and other penalties if
they engage in prohibited transactions. In addition, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the plans investing in the general account --
e.g., through the purchase of an annuity contract. ERISA also imposes certain
duties on persons who are fiduciaries of plans subject to ERISA.
Certain transactions involving the purchase, holding or transfer of the
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the trust were deemed to be assets of a plan. Under a
regulation issued by the United States Department of Labor, the assets of the
trust would be treated as assets of a plan for the purposes of ERISA and the
Code only if the plan acquires an "equity interest" in the trust and none of the
exceptions contained in the plan asset regulation is applicable. An equity
interest is defined under the plan asset regulation as an interest other than an
instrument which is treated as indebtedness under applicable local law and which
has no substantial equity features. Although there is little guidance on the
subject, the notes should be treated as indebtedness without substantial equity
features for purposes of the plan asset regulation. This determination is based
in part on the traditional debt features of the notes, including the reasonable
expectation of purchasers of the notes that the notes will be repaid when due,
as well as the absence of conversion rights, warrants and other typical equity
features. The debt treatment of the notes could change if the trust incurs
losses. However, even if the notes are treated as debt for such purposes, the
acquisition or holding of notes by or on behalf of a plan could be considered to
give rise to a prohibited transaction if the trust or any of its affiliates is
or becomes a party-in-interest or a disqualified person with respect to such
plan. In such case, certain exemptions from the prohibited transaction rules
could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a note. Included among these exemptions
are: PTCE 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions affected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers." Each investor using the assets of a plan which acquires the notes, or
to whom the notes are transferred, will be deemed to have represented that the
acquisition and continued holding of the notes will be covered by one of the
exemptions listed above or by another Department of Labor Class Exemption.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
December 6, 2000 between the depositor and Bear, Stearns & Co. Inc., as
representative of the underwriters, the depositor has agreed to sell to the
underwriters and the underwriters have agreed to purchase from the depositor the
notes. The depositor is obligated to sell, and the underwriters are obligated to
purchase, all of the notes offered hereby if any are purchased.
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<PAGE>
In the underwriting agreement, the underwriters have agreed to purchase
the entire principal amount of the notes in the following amounts:
Principal Amount of
Underwriter Notes
----------- -----
Bear, Stearns & Co. Inc. $ 247,500,000
Morgan Stanley & Co. Incorporated $ 27,500,000
---------------
Total................................... $ 275,000,000
===============
The underwriters have advised the depositor that they propose to offer
the notes purchased by the underwriters for sale from time to time in one or
more negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
The underwriters may effect such transactions by selling such notes to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriters or
purchasers of the notes for whom they may act as agent. Any dealers that
participate with the underwriters in the distribution of the notes purchased by
the underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the underwriters and any profit on the resale of
notes by them or the underwriters may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933.
In connection with the offering of the notes, the underwriters and
their affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of the notes. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M,
pursuant to which such person may bid for or purchase the notes for the purpose
of stabilizing its market price. Any of the transactions described in this
paragraph may result in the maintenance of the price of the notes at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are taken,
may be discontinued at any time without notice.
The depositor has been advised by the underwriters that the
underwriters presently intend to make a market in the notes, as permitted by
applicable laws and regulations. The underwriters are not obligated to make a
market in the notes and any market making may be discontinued at any time at the
sole discretion of the underwriters. Accordingly, no assurance can be given as
to the liquidity of, or trading markets for, the notes.
For further information regarding any offer or sale of the notes
pursuant to this prospectus supplement and the accompanying prospectus, see
"Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify
the underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Bear, Stearns & Co. Inc. is an affiliate of the depositor.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Information by
Reference" and the consolidated financial statements of Ambac Assurance
Corporation
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<PAGE>
and subsidiaries included in, or as exhibits to, the Annual Report on Form 10-K,
as amended, for the year ended December 31, 1999, and the Quarterly Report on
Form 10-Q as described under "The Note Insurer" each of which has been filed by
Ambac Financial Group, Inc.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
ADDITIONAL INFORMATION
Bear Stearns Asset Backed Securities, Inc. has filed with the
Securities and Exchange Commission a registration statement (Registration No.
333-43278) under the Securities Act of 1933, with respect to the notes offered
pursuant to this prospectus supplement. This prospectus supplement and the
accompanying prospectus, which form a part of the registration statement, omit
certain information contained in such registration statement pursuant to the
rules and regulations of the Securities and Exchange Commission. You may read
and copy the registration statement at the Public Reference Room at the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. and at the Securities and Exchange Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York, 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Rooms. In
addition, the Securities and Exchange Commission maintains a site on the World
Wide Web containing reports, proxy materials, information statements and other
items. The address is http://www.sec.gov.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1999 and 1998 and for each of the years in
the three year period ended December 31, 1999, are incorporated by reference in
this prospectus supplement and in the registration statement, in reliance on the
report of KPMG LLP, independent certified public accountants, incorporated by
reference in this prospectus supplement, and upon the authority of that firm as
experts in accounting and auditing.
The balance sheet of ABFS Mortgage Loan Trust 2000-4 as of December 14,
2000, set forth as Exhibit A hereto, has been audited by BDO Seidman LLP,
independent public accountants, as set forth in their report with respect
thereto, and is included herein in reliance upon the authority of that firm as
experts in giving said reports.
LEGAL MATTERS
Certain legal matters in connection with the notes will be passed upon
for the originators and the servicer by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania, for the trust by Stradley, Ronon, Stevens & Young,
LLP, Wilmington, Delaware, for the depositor and the underwriters by Morgan,
Lewis & Bockius LLP, New York, New York, and for the seller by Dewey Ballantine
LLP, New York, New York.
RATINGS
It is a condition to the original issuance of the notes that they will
receive ratings of "AAA" by Standard & Poor's and "Aaa" by Moody's. The ratings
assigned to the notes will take into account the
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claims-paying ability of the note insurer. Explanations of the significance of
such ratings may be obtained from Moody's Investors Service, Inc., 99 Church
Street, New York, New York 10007 and Standard & Poor's Rating Services, a
division of the McGraw Hill Companies, Inc., 55 Water Street, New York, New York
10041. Such ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the notes.
GLOSSARY
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount for any payment date is the amount on deposit in the
payment account, exclusive of the amount of any Insured Payment and the
servicing fee, on that payment date.
Class A Carry-Forward Amount for any payment date is the sum of (a) the
amount, if any, by which (x) the Class A Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the class A notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A Note Rate.
Class A Interest Payment Amount for any payment date will be an amount
equal to the sum of the Current Interest for the class A notes on such payment
date, less the amount of any Net Mortgage Loan Interest Shortfalls relating to
such payment date, plus the Class A Carry-Forward Amount, less any amounts paid
by the note insurer in respect of such Class A Carry-Forward Amount, in each
case, as of such payment date.
Class A Note Rate with respect to any payment date, the per annum rate
equal to 7.05%; provided, that, on any payment date after the Clean-Up Call
Date, the Class A Note Rate will be 7.55%.
Clean-Up Call Date means the first payment date on which the aggregate
outstanding principal balance of the mortgage loans is equal to or less than 10%
of the aggregate original principal balance of the mortgage loans as of the
Cut-off Date.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related payment date
resulting from principal prepayments in full during the related due period and
(b) the aggregate of the servicing fees received by the servicer in the related
due period; provided, however, that Compensating Interest with respect to any
mortgage loan and any payment date shall not exceed the servicing fees due in
respect of such mortgage loan on such payment date.
Current Interest for any payment date is the sum of the interest that
accrued on the notes at the Class A Note Rate on the aggregate outstanding
principal balance of such class during the related accrual period.
Cut-Off Date means the close of business on November 30, 2000;
provided, that with respect to mortgage loans originated after November 30,
2000, the Cut-Off Date shall be the date of origination of such mortgage loans.
Deficiency Amount means, for any payment date, the excess, if any, of
Required Distributions over the Net Available Amount.
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Due for Payment means, the payment date on which Insured Amounts are
due.
Excess Interest for any payment date is equal to the excess of (x) the
Available Amount for such payment date over (y) the sum of
o the Interest Payment Amount for such payment date;
o the Principal Payment Amount for such payment date -- calculated
for this purpose without regard to any Over-collateralization
Increase Amount or portion thereof included therein;
o any Premium Amount, Reimbursement Amount or other amount owed to
the note insurer; and
o the indenture trustee's fees for such payment date.
Excess Over-collateralized Amount means, with respect to a payment
date, the difference, if any, between (a) the Over-collateralized Amount that
would apply on such payment date after taking into account all payments to be
made on such payment date, except for any payments of related
Over-collateralization Reduction Amounts, and (b) the Specified
Over-collateralized Amount.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (x) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of such servicer remittance date over (y) the sum of such unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Insurance Proceeds are proceeds paid by any insurer other than the note
insurer pursuant to any insurance policy covering a mortgage loan to the extent
such proceeds are not applied to the restoration of the related mortgaged
property or released to the related mortgagor. "Insurance Proceeds" do not
include "Insured Payments."
Insured Amounts means, with respect to any payment date, any Deficiency
Amount for such payment date.
Insured Payments shall mean, the aggregate amount actually paid by the
note insurer to the indenture trustee in respect of (i) Insured Amounts for a
payment date and (ii) Preference Amounts for any given business day.
Interest Payment Amount means the Class A Interest Payment Amount.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (x) the unpaid principal balance of such Liquidated Mortgage Loan
plus accrued and unpaid interest on such unpaid principal balance from the due
date to which interest was last paid by the mortgagor over (y) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of such mortgage loan.
Liquidated Mortgage Loan is a mortgage loan that is being liquidated by
the servicer in connection with (x) the taking of all or a part of a Mortgaged
Property by exercise of the power of eminent domain or condemnation or (y) the
liquidation of a defaulted mortgage loan through a sale, foreclosure sale, REO
disposition or otherwise.
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Liquidation Expenses as to any Liquidated Mortgage Loan are all
expenses incurred by the servicer in connection with the liquidation of such
mortgage loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed servicing advances. In no event may Liquidation
Expenses with respect to a Liquidated Mortgage Loan exceed the related
Liquidation Proceeds.
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (x) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(y) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO disposition or otherwise.
Mortgage Loan Interest Shortfalls means Relief Act Shortfalls and
Prepayment Interest Shortfalls.
Net Available Amount is, for any payment date, the Available Amount,
less the indenture trustee's fees, the owner trustee's fees and the premiums due
to the note insurer on that payment date.
Net Foreclosure Profits as to any servicer remittance date, are the
excess, if any, of (x) the aggregate Foreclosure Profits with respect to such
servicer remittance date over (y) Liquidated Loan Losses with respect to such
servicer remittance date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer.
Net Mortgage Loan Interest Shortfalls for any payment date will be the
aggregate of the Mortgage Loan Interest Shortfalls, if any, for such payment
date, to the extent such Mortgage Loan Interest Shortfalls are not paid by the
servicer as Compensating Interest.
Net REO Proceeds as to any REO property, are REO Proceeds net of any
related expenses of the servicer.
Over-collateralization Deficit for any payment date, is the amount by
which the aggregate outstanding principal balance of the notes exceeds the
aggregate principal balance of the mortgage loans.
Over-collateralization Increase Amount for any payment date is the
amount of Excess Interest to be applied as an accelerated payment of principal
on the notes until the over-collateralization reaches the Specified
Over-collateralized Amount. Such payment is limited to the extent of the
Available Amount.
Over-collateralization Reduction Amount with respect to any payment
date, is the lesser of (a) the Excess Over-collateralized Amount for such
payment date and (b) the Principal Payment Amount for such payment date (without
regard to clause (b)(10) of the definition of Principal Payment Amount).
Over-collateralized Amount means, with respect to any payment date, the
excess, if any, of (a) the aggregate principal balances of the mortgage loans as
of the close of business on the last day of the preceding calendar month over
(b) the aggregate principal balance of the notes as of such payment date --
following the making of all payments on such payment date, other than with
respect to any Over-collateralization Increase Amount for such payment date.
Periodic Advances means advances made by the servicer on each payment
date with respect to delinquent payments of interest on the mortgage loans, at a
rate equal to the interest rate on the related mortgage note, less the servicing
fee rate.
S-57
<PAGE>
Preference Amount means any payment of principal or interest on a note
which has become Due for Payment and which is made to an owner of a note by or
on behalf of the indenture trustee which has been deemed a preferential transfer
and was previously recovered from its owner pursuant to the United States
Bankruptcy Code in accordance with a final, nonappealable order of a court of
competent jurisdiction.
Premium Amount means the premium payable to the note insurer on each
payment date pursuant to the policy.
Prepayment Interest Shortfall means, with respect to any payment date,
an amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of such mortgage loans at a per annum rate equal
to the related mortgage interest 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, any reduction as a result of a bankruptcy
proceeding and/or any reduction by a court of the monthly payment due on such
mortgage loan -- minus the rate at which the servicing fee is calculated, over
(b) the amount of interest actually remitted by the related mortgagor in
connection with such principal prepayment in full, less the servicing fee for
such mortgage loan in such month.
Principal Payment Amount for any payment date will be the lesser of:
(a) the excess of (x) the sum, as of such payment date, of (A) the
Available Amount and (B) any Insured Payment over (y) the sum of the Interest
Payment Amount, the indenture trustee's fees, the Premium Amount and the
Reimbursement Amount; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage loans actually
collected during the related due period;
(2) the principal balance of each mortgage loan that either
was repurchased by the seller or purchased by the
servicer on the related servicer remittance date, to the
extent such principal balance is actually received by
the indenture trustee;
(3) any substitution adjustments delivered by the seller on
the related servicer remittance date in connection with
a substitution of a mortgage loan, to the extent such
substitution adjustments are actually received by the
indenture trustee;
(4) the Net Liquidation Proceeds actually collected by the
servicer of all mortgage loans during the prior calendar
month -- to the extent such Net Liquidation Proceeds
relate to principal;
(5) the proceeds received by the indenture trustee upon the
exercise by the trust certificateholder or the servicer,
as applicable, of its option to call the notes -- to the
extent such proceeds relate to principal;
(6) the amount of any Over-collateralization Deficit for
such payment date;
(7) the proceeds received by the indenture trustee on any
termination of the trust-- to the extent such proceeds
relate to principal;
S-58
<PAGE>
(8) the amount of any Over-collateralization Increase Amount
for such payment date, to the extent of any Excess
Interest available for such purpose;
(9) if the note insurer shall so elect, an amount of
principal -- including Liquidated Loan Losses -- that
would have been payable pursuant to clauses (1) through
(8) above if sufficient funds were available therefor;
minus
(10) the amount of any Over-collateralization Reduction
Amount for such payment date.
In no event will the Principal Payment Amount with respect to any
payment date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance of the notes.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the
same type of residential dwelling or commercial property as the
deleted mortgage loan and, has or have the same or a better lien
priority as the deleted mortgage loan and has or have the same
occupancy status as the deleted mortgage loan or is or are
owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTV at the time of such substitution no
higher than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of such substitution no
higher than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date of
substitution, not substantially less and not more than the
principal balance of the deleted mortgage loan as of such date,
o has or have a mortgage interest rate of at least the same interest
rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty set forth in the Unaffiliated Seller's
Agreement.
Reimbursement Amount means, with respect to each payment date, the
amount of all Insured Payments and other amounts due to the note insurer
pursuant to the Insurance Agreement which have not been previously paid.
Relief Act Shortfalls are interest shortfalls resulting from the
application of the Soldier's and Sailors' Civil Relief Act of 1940.
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<PAGE>
Required Distributions means, with respect to (1) any payment date
occurring prior to the payment date in December 2031, the sum of (x) the
Interest Payment Amount -- net of any Net Mortgage Loan Interest Shortfalls --
and (y) the Over-collateralization Deficit, and (2) the final scheduled payment
date, the sum of (x) the amount set forth in clause (1)(x) above and (y) the
aggregate outstanding principal balance, if any, of the notes, after giving
effect to all other payments of principal on the notes on that payment date.
REO Proceeds are monies received in respect of any REO property,
including, without limitation, proceeds from the rental of the related mortgaged
property.
Specified Over-collateralized Amount with respect to any payment date
will be the amount of over-collateralization which the note insurer requires
with respect to such payment date and which amount may step up or step down as
determined in the insurance agreement.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
REPORT OF INDEPENDENT AUDITORS
First Union Trust Company, National Association,
as Owner Trustee of
ABFS Mortgage Loan Trust 2000-4
We have audited the accompanying balance sheet of ABFS Mortgage Loan
Trust 2000-4, a Delaware business trust as of December 14, 2000. This balance
sheet is the responsibility of the trust. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of ABFS Mortgage Loan Trust
2000-4, at December 14, 2000, in conformity with generally accepted accounting
principles.
BDO Seidman LLP
December 14, 2000
Philadelphia, Pennsylvania
A-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors..............................................A-1
Balance Sheet of the Trust as of December 14, 2000..........................A-2
Notes to Balance Sheet......................................................A-4
A-2
<PAGE>
ABFS MORTGAGE LOAN TRUST 2000-4
BALANCE SHEET
DECEMBER 14, 2000
--------------------------------------------------------------------------------
ASSETS
Cash....................................................... $ 1,000
-------
Total assets.......................................... $ 1,000
=======
LIABILITIES AND CERTIFICATEHOLDERS' EQUITY
Liabilities................................................ $ 0
Certificateholders equity.................................. $ 1,000
-------
Total liabilities and certificateholders' equity...... $ 1,000
=======
See accompanying notes.
A-3
<PAGE>
ABFS MORTGAGE LOAN TRUST 2000-4
NOTES TO BALANCE SHEET
DECEMBER 14, 2000
1 Formation
ABFS Mortgage Loan Trust 2000-4, a Delaware statutory business trust, was
formed in the state of Delaware on December 12, 2000, with First Union Trust
Company, National Association, as its owner trustee.
The trust was formed to engage exclusively in the following business and
financial activities: to purchase or acquire from certain direct and indirect
subsidiaries of American Business Financial Services, Inc. certain property
relating to certain receivables consisting of business purpose loans and
consumer purpose home equity loans, and to pledge such receivables or interests
therein to The Chase Manhattan Bank, as indenture trustee.
2. Capital Contribution
ABFS 2000-4, Inc. made an initial capital contribution of $1,000 to the
trust on December 14, 2000.
3. Registration Statement
At December 14, 2000, the trust was in the process of preparing to issue up
to $275,000,000 of its Mortgage-Backed Notes, Series 2000-4.
A-4
<PAGE>
PROSPECTUS
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
-------------------------- THE SECURITIES
| CONSIDER CAREFULLY THE |
| RISK FACTORS BEGINNING | Bear Stearns Asset Backed Securities, Inc., as
| ON PAGE 3 OF THIS | depositor, will sell the securities, which may be
| PROSPECTUS. | in the form of asset-backed certificates or
| | asset-backed notes. Each issue of securities will
| The securities represent | have its own series designation and will evidence
| obligations of the trust | either:
| only and do not |
| represent an interest in | o ownership interests in certain assets in a
| or obligation of the | trust fund or
| depositor, the seller, |
| the master servicer or | o debt obligations secured by certain assets
| any of their affiliates. | in a trust fund.
| |
| This prospectus may be | Each series of securities will consist of one
| used to offer and sell | or more classes. Each class of securities will
| the securities only if | represent the entitlement to a specified portion
| accompanied by a | of future interest payments and a specified
| prospectus supplement. | portion of future principal payments on the assets
-------------------------- in the related trust fund. In each case, the
specified portion may equal from 0% to 100%. A
series may include one or more classes of
securities that are senior in right of payment to
one or more other classes. One or more classes of
securities may be entitled to receive
distributions of principal, interest or both prior
to one or more other classes, or before or after
certain specified events have occurred. The
related prospectus supplement will specify each of
these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o closed-end and/or revolving home equity loans secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties or by purchase money security interests in the related
home improvements; and
o private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities are made through Bear, Stearns & Co. Inc. and
the other underwriters listed in the related prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
DECEMBER 6, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series. If the
prospectus supplement contains information about a particular series
that differs from the information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following information
with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the home equity loans, home improvement
contracts and/or private securities in the related trust fund;
o information concerning the seller or sellers of the home equity loans,
home improvement contracts and/or private securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset Securities, Inc., 245 Park
Avenue, New York, New York 10167 and our telephone number is (212) 272-4095. For
other means of acquiring additional information about us or a series of
securities, see "The Trust Funds -- Incorporation of Certain Information by
Reference" beginning on page 86 of this prospectus.
2
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
LIMITED LIQUIDITY
No market will exist for the securities of any series before they are
issued. In addition, we cannot give you any assurance that a resale market will
develop following the issuance and sale of any series of the securities. Even if
a resale market does develop, it might not provide you with liquidity of
investment or continue for the life of the securities.
LIMITED ASSETS FOR MAKING PAYMENTS
The securities of each series will be payable solely from the assets of
the related trust fund, including any credit enhancement that may be applicable
to certain classes. In the case of securities that are in the form of notes, the
related indenture will require that noteholders proceed only against the assets
of the related trust fund. We cannot give you any assurance that the market
value of the assets in any trust fund will be equal to or greater than the total
principal amount of the related series of securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust fund are ever sold, the
sale proceeds will be applied first to reimburse any related trustee, servicer
and credit enhancement provider for their unpaid fees and expenses before any
remaining amounts are distributed to securityholders.
In addition, at the times specified in the related prospectus
supplement, certain assets of the trust fund and the related security accounts
may be released to the depositor, the servicer, the credit enhancement provider
or other persons, if
o all payments then due on the related securities have been made,
and
o any other payments specified in the related prospectus supplement
have been made.
Once released, such assets will no longer be available to make payments
to securityholders.
You will have no recourse against the depositor or any other person if
any required distribution on the securities is not made or for any other
default. The only obligations of the depositor with respect to the related trust
fund or the securities would result from a breach of the representations and
warranties that the depositor may make concerning the trust assets. However,
because of the depositor's very limited assets, even if the depositor should be
required to repurchase a loan from a particular trust fund because of the breach
of a representation or warranty, its sole source of funds for the repurchase
would be:
o funds obtained from enforcing any similar obligation of the
originator of the loan, or
o monies from any reserve fund established to pay for loan
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
YOUR YIELDS ON THE SECURITIES MAY VARY
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans in the trust
fund or, if the trust fund contains underlying
3
<PAGE>
securities, on the loans backing the underlying securities;
o the method by which payments of principal are allocated among the
classes of securities of that series as specified in the related
prospectus supplement;
o if any party has an option to terminate the related trust early,
the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor or a seller; and
o in the case of a trust fund that contains revolving credit line
loans, any provisions for non-amortization, early amortization or
scheduled amortization periods described in the related prospectus
supplement.
All the above factors may affect the yield to maturity of the
securities.
Interest payable on the securities on any given distribution date will
include all interest accrued during the related interest accrual period. Each
prospectus supplement will specify the interest accrual period for the
securities of the related series. If interest accrues during the calendar month
before the related distribution date, your effective yield will be less than it
would be if the interest accrual period ended the day before the distribution
date. As a result, your effective yield at par may be less than the indicated
coupon rate.
SOME LOANS REQUIRE BALLOON PAYMENTS
Certain of the underlying loans may not be fully amortizing over their
terms to maturity and may require a substantial principal payment (i.e., a
"balloon" payment) at their stated maturity. Loans of this type involve a
greater degree of risk than fully amortizing loans since the related borrower
generally must be able to refinance the loan or sell the related property prior
to the loan's maturity date. The borrower's ability to do so will depend on such
factors as the level of available mortgage rates at the time of sale or
refinancing, the relative strength of the local housing market, the borrower's
equity in the property, the borrower's general financial condition and tax laws.
ADJUSTABLE RATE LOANS MAY BE UNDERWRITTEN DIFFERENTLY
A trust fund may include adjustable rate loans that were underwritten
on the assumption that the borrowers would be able to make higher monthly
payments in a relatively short period of time. In fact, however, the borrowers'
income may not be sufficient to meet their loan payments as payment amounts
increase, thus increasing the risk of default.
PROPERTY VALUES MAY BE INSUFFICIENT
If the home equity loans in a trust fund are primarily in a junior lien
position, any proceeds from liquidations, insurance recoveries or condemnations
must be used first to satisfy the claims of the related senior lien loans (and
related foreclosure expenses) before being available to satisfy the junior lien
loans. In addition, a junior mortgage lender may only foreclose subject to the
related senior mortgage. As a result, the junior mortgage lender must either pay
the related senior mortgage lender in full, at or before the foreclosure sale,
or agree to make the regular payments on the senior mortgage. The trust will not
have a source of funds to satisfy any senior mortgages or to continue making
payments on them. As a result, the trust's ability, as a practical matter, to
foreclose on any junior mortgage loan will be quite limited. The following
factors, among others, could adversely affect property values in such a way that
the outstanding balance of the related loans, together with any senior financing
on the same properties, would equal or exceed those values:
o an overall decline in the residential real estate markets where
the properties are located;
4
<PAGE>
o failure of borrowers to maintain their properties adequately; and
o natural disasters that may not be covered by hazard insurance,
such as earthquakes and floods.
If property values decline, actual rates of delinquencies, foreclosures
and losses on the underlying loans could be higher than those currently
experienced by the mortgage lending industry in general.
HOME IMPROVEMENT CONTRACTS AND OTHER LOANS MAY NOT HAVE SUFFICIENT SECURITY
A trust fund may include home improvement contracts that are not
secured by an interest in real estate or otherwise. It may also include home
equity loans with original loan-to-value ratios (or combined loan-to-value
ratios in the case of junior loans) greater than 100%. In these cases, the trust
fund could be treated as a general unsecured creditor for the unsecured portion
of these loans.
If a loan of this type goes into default, the trust fund will have
recourse only against the borrower's assets generally for the unsecured portion
of the loan, along with the borrower's other general unsecured creditors. In a
bankruptcy proceeding, the unsecured portion of the loan may be discharged, even
if the value of the borrower's assets available to the trust fund would be
insufficient to pay the remaining amounts owing on the loan.
HOME IMPROVEMENT CONTRACTS WILL NOT BE STAMPED
The depositor will ensure that a UCC-1 financing statement is filed
that identifies as collateral the home improvement contracts included in a trust
fund. However, unless the related prospectus supplement provides otherwise, the
home improvement contracts themselves will not be stamped or marked to reflect
their assignment to the trust fund. Thus, if as a result of negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of the assignment to the trust fund, the interests of
the related securityholders in those contracts could be defeated.
PRE-FUNDING MAY ADVERSELY AFFECT YOUR INVESTMENT
The related prospectus supplement may provide that the depositor or
seller will deposit a specified amount in a pre-funding account on the date the
securities are issued. In this case, the deposited funds may be used only to
acquire additional assets for the trust during a specified period after the
initial issuance of the securities. Any amounts remaining in the account at the
end of that period will be distributed as a prepayment of principal to the
holders of the related securities. As a result, the yield to maturity on your
investment may be adversely affected.
BANKRUPTCY LAWS MAY ADVERSELY AFFECT TRUST FUND ASSETS
The federal bankruptcy code and state debtor relief laws may adversely
affect the ability of the trust fund, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy proceeding, a lender may not
foreclose on mortgaged property without the bankruptcy court's permission.
Similarly, the debtor may propose a rehabilitation plan, in the case of
mortgaged property that is not his principal residence, that would reduce the
amount of the lender's secured indebtedness to the value of the property as of
the commencement of the bankruptcy. As a result, the lender would be treated as
a general unsecured creditor for the reduced amount, the amount of the monthly
payments due on the loan could be reduced, and the interest rate and loan
payment schedule could be changed.
Any such actions could result in delays in receiving payments on the
loans underlying the securities and result in the reduction of total payments.
ENVIRONMENTAL RISKS MAY ADVERSELY AFFECT TRUST FUND ASSETS
Federal, state and local laws and regulations impose a wide range of
requirements on activities
5
<PAGE>
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 that secure the loans. Failure to comply
with these laws and regulations can result in fines and penalties that could be
assessed against the trust fund as owner of the related property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Further, a mortgage lender may
be held liable as an "owner" or "operator" for costs associated with the release
of petroleum from an underground storage tank under certain circumstances. If
the trust fund is considered the owner or operator of a property, it will suffer
losses as a result of any liability imposed for environmental hazards on the
property.
CONSUMER PROTECTION LAWS MAY ADVERSELY AFFECT TRUST FUND ASSETS
The loans and contracts in each trust fund also may be subject to
federal laws relating to loan origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the terms
of the loans;
o 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;
o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit changes that may
be made to the loan documents without the borrower's consent and
restrict a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit to certain enumerated events.
Certain loans are also subject to federal laws that impose additional
disclosure requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. These laws can
impose specific liabilities upon creditors that fail to comply and may affect
the enforceability of the related loans. In addition, the trust fund, as
assignee of the creditor, would generally be subject to all claims and defenses
that the borrower could assert against the creditor, including the right to
rescind the loan.
Certain home improvement contracts are subject to federal laws that
protect the borrower from defective or incomplete work by a contractor. These
laws permit the borrower to withhold payment if the work does not meet the
quality and durability standards agreed to between the borrower and the
contractor. These laws have the effect of subjecting the trust fund, as assignee
of the creditor, to all claims and defenses which the borrower in a sale
transaction could assert against the seller of defective goods.
If certain provisions of these federal laws are violated, the servicer
may be unable to collect all or part of the principal or interest on the loans.
The trust fund also could be subject to damages and administrative enforcement.
SUBORDINATE SECURITIES ARE SUBJECT TO ADDITIONAL RISK
If you invest in any class of subordinate securities, your rights as an
investor to receive payments otherwise due you will be subordinate to the rights
of the servicer and the holders of the related senior securities. As a result,
before investing in any subordinate securities, you must be prepared to bear the
risk that payments on your securities may be delayed and that you might not
recover all of your initial investment.
FINANCIAL INSTRUMENTS MAY NOT PERFORM AS EXPECTED
As described under "Enhancement--Financial Instruments," a trust fund
may include
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financial instruments to protect against certain risks or to provide certain
cash flow characteristics for particular classes of the securities of a series.
If you invest in such a class and the issuer of the financial instruments fails
to perform its obligations, the yield to maturity, market price and liquidity of
your securities could be materially adversely affected. In addition, if the
issuer of the related financial instruments experiences a credit rating
downgrade, the market price and liquidity of your securities could be reduced.
Finally, if the financial instruments are intended to provide an approximate or
partial hedge for certain risks or cashflow characteristics, the yield to
maturity, market price and liquidity of your securities could be adversely
affected to the extent that the financial instrument does not provide a perfect
hedge.
REMIC RESIDUAL SECURITIES ARE SUBJECT TO ADDITIONAL RISK
If you invest in any class of securities that represent the "residual
interest" in a real estate mortgage investment conduit (REMIC), you will be
required to report as ordinary income your pro rata share of the REMIC's taxable
income, whether or not you actually received any cash. Thus, as the holder of a
REMIC residual interest security, you could have taxable income and tax
liabilities in a year that are in excess of your ability to deduct servicing
fees and any other REMIC expenses. In addition, because of their special tax
treatment, your after-tax yield on a REMIC residual interest security may be
significantly less than that of a corporate bond with similar cash-flow
characteristics and pre-tax yield. Transfers of REMIC residual interest
securities are also restricted.
FASIT OWNERSHIP SECURITIES ARE SUBJECT TO ADDITIONAL RISK
If you are a fully taxable domestic corporation that invests in any
class of securities representing the "ownership interest" in a financial asset
securitization investment trust (FASIT), you will be required to report as
ordinary income your pro rata share of the FASIT's taxable income, whether or
not you actually received any cash. Thus, as the holder of a FASIT ownership
interest security, you could have taxable income and tax liabilities in a year
that are in excess of your ability to deduct servicing fees and any other FASIT
expenses. In addition, because of their special tax treatment, your after-tax
yield on a FASIT ownership interest security may be significantly less than that
of a corporate bond with similar cash-flow characteristics and pre-tax yield.
Transfers of FASIT ownership interest securities are also restricted.
BOOK ENTRY REGISTRATION
Limit on Liquidity of Securities. Securities issued in book-entry form
may have only limited liquidity in the resale market, since investors may be
unwilling to purchase securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry
securities can be effected only through The Depository Trust Company (DTC), its
participating organizations, its indirect participants and certain banks. As a
result, your ability to transfer or pledge securities issued in book-entry form
may be limited.
Delays in Distributions. You may experience some delay in the receipt
of distributions on book-entry securities since the distributions will be
forwarded by the trustee to DTC for credit to the accounts of its participants.
In turn, these participants will credit the distributions to your account either
directly or indirectly through indirect participants.
SECURITY RATINGS ARE NOT RECOMMENDATIONS
Any class of securities issued under this prospectus and the
accompanying prospectus supplement will be rated in one of the four highest
rating categories of a nationally recognized rating agency. A rating is based on
the adequacy of the value of the trust fund assets and any credit enhancement
for that class and reflects the rating agency's assessment of the likelihood
that holders of the class of securities will receive the payments to which they
are entitled. A rating is not an assessment of the likelihood that principal
prepayments on the
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underlying loans will be made, the degree to which the rate of prepayments might
differ from that originally anticipated or the likelihood of an early
termination of the securities. You should not view a rating as a recommendation
to purchase, hold or sell securities because it does not address the market
price or suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any
given period or that the rating agency will not lower or withdraw the rating in
the future. The rating agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust fund assets
or any related credit enhancement, or
o an adverse change in the financial or other condition of a credit
enhancement provider.
DESCRIPTION OF THE SECURITIES
GENERAL
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") will
establish a trust fund (each, a "Trust Fund") for each series (a "Series") of
its Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to that Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part. If the Trust Fund includes Loans, the Trust
Fund and the related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
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 related Servicer (if the Trust Fund includes Loans) and
the related 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. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets included in the Trust Fund, may agree to reimburse the
Depositor for certain fees and expenses that the Depositor incurs in connection
with the offering of the related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, 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 in this prospectus
by reference as part of such summaries.
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Each Series of Securities will consist of one or more classes (each, a
"Class"), one or more of which may be compound interest Securities, variable
interest Securities, planned balance (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 any conditions, applicable to a
particular Class as described in the related Prospectus Supplement, the transfer
of the Securities may be registered and the Securities may be exchanged at the
office of the Trustee without the payment of any service charge, other than any
tax or governmental charge payable in connection with the 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 (each, a
"Distribution Date") by check mailed to holders of that Series, registered as
such at the close of business on the record date (specified in the Prospectus
Supplement) that is applicable to that Distribution Date at their addresses
appearing on the security register (each, a "Holder"). However, payments may be
made by wire transfer (at the expense of the Holder requesting payment by wire
transfer) in certain circumstances described in the Prospectus Supplement. In
addition final payments of principal in retirement of each Security will be made
only upon presentation and surrender of the Security at the office of the
related Trustee. Notice of the final payment on a Security will be mailed to the
Holder of that Security before the Distribution Date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, the following amounts will be deposited directly into an
account (each, a "Collection Account") established for a particular Series with
the Trustee (or with the Servicer in the name of the Trustee):
o all payments with respect to the Primary Assets (as defined below)
for a Series, together with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the Prospectus Supplement as rating that Series
(each, a "Rating Agency") deposited in one or more reserve funds
established in the name of the Trustee (each, a "Reserve Fund");
and
o amounts available pursuant to any other credit enhancement.
If provided in the related Prospectus Supplement, the deposits may be
net of certain amounts payable to the Servicer and any other person specified in
the Prospectus Supplement. Those amounts thereafter will be deposited into the
separate distribution account (each, a "Distribution Account") established for
that Series and will be available to make payments on the Securities of that
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts" in this prospectus.
THE PRIMARY ASSETS AND THEIR VALUATION
The "Primary Assets" of each Trust Fund may include one or more pools
of the following:
o closed-end and/or revolving home equity loans (the "Mortgage
Loans"), secured by senior or subordinate liens on one- to
four-family residential or mixed-use properties;
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o 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 related home improvements (the
"Home Improvements"); and
o securities (the "Private Securities") backed or secured by
Mortgage Loans, Contracts and/or Home Improvement Contracts (the
"Underlying Loans").
The Mortgage Loans and the Home Improvement Contracts are collectively
referred to in this prospectus as the "Loans". The residential or mixed-use
properties that secure the Mortgage Loans are collectively referred to in this
prospectus as the "Mortgaged Properties".
If specified in the related Prospectus Supplement for a Series of
Notes, each Primary Asset included in the related Trust Fund 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
o the product of the Asset Value Percentage as set forth in the
Indenture and
o 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 that 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.
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 or reinvestment agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is insured in this way, the related Prospectus Supplement will set forth
the terms of the arrangement.
PAYMENTS OF INTEREST
The Securities of each Class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related Prospectus Supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified, or will be entitled to
receive interest payment amounts calculated in the method described, in the
related Prospectus Supplement. Interest on the interest-bearing 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 interest rates of the Loans
(or Underlying Loans) included in the related Trust Fund and/or as prepayments
occur with respect to the Loans (or Underlying Loans). 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 principal on such Distribution Date.
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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 that Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the related Securities on which principal is then payable, to
the extent set forth in the related Prospectus Supplement. The payments will be
made in a total amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of the 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 total principal balance of
that Class will be fully paid, and with respect to each Class of a Series of
Certificates is the date on which the principal balance of that Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to that 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 that reduce the outstanding
principal amount of the Securities, it is likely that the actual final
Distribution Date of any 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, the actual final Distribution Date of any Certificate may
occur later than its Final Scheduled Distribution Date as a result of
delinquencies, defaults and liquidations of the Primary Assets in the Trust
Fund. No assurance can be given as to the actual prepayment experience with
respect to a Series. See "-Weighted Average Lives 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 that 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 related Loans (or
Underlying Loans) or low yields then available for reinvestment, the entity
specified in the Prospectus Supplement determines, based on assumptions set
forth in the applicable Agreement, that the amount available for the payment of
interest that will have accrued on those 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 those Securities to that date. In this event and as further described in the
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of that Series sufficient to cause the Available Interest Amount to
equal the amount of interest that will have accrued through the designated
interest accrual date for that Series of Securities outstanding immediately
after the redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer or any other entity that may be
designated in the related Prospectus Supplement will have the option to redeem,
in whole or in part, one or more Classes of Notes or purchase
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one or more Classes of Certificates of any Series on any Distribution Date under
the circumstances, if any, specified in the related Prospectus Supplement.
Alternatively, if the Prospectus Supplement for a Series of Certificates so
provides, the Depositor, the Servicer or another entity designated in the
related Prospectus Supplement will have the option to cause an early termination
of the Trust Fund by repurchasing all of the Primary Assets from the Trust Fund
on or after a date specified in the Prospectus Supplement, or on or after such
time as the total outstanding principal amount of the Certificates or Primary
Assets (as specified in the Prospectus Supplement) is equal to or less than the
amount or percentage specified in the 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 Prospectus Supplement. If specified in the 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 Internal Revenue Code of 1986, as amended (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 LIVES 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
the 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, whether 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, that is used
and may contain tables setting forth the projected weighted average life of each
Class of Securities of the Series and the percentage of the original principal
amount of each Class of Securities of the Series that would be outstanding on
specified Distribution Dates 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 the 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 others. The
deductibility of mortgage interest payments, servicing decisions and other
factors also can 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 the
Loans (or Underlying Loans).
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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) for a Series, those loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by those loans. In this regard, it should be noted that the Loans
(or Underlying Loans) for a Series may have different interest rates. In
addition, the weighted average life of a Class of the Securities may be affected
by the varying maturities of the Loans (or Underlying Loans). If any Loans (or
Underlying Loans) for a Series have actual terms to stated maturity that are
less than those that were 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 by the Depositor from the Seller composed of:
o the Primary Assets;
o amounts available from the reinvestment of payments on the Primary
Assets at the Assumed Reinvestment Rate, if any, specified in the
related Prospectus Supplement;
o any credit enhancement ("Enhancement") in the form of an
irrevocable letter of credit, surety bond, insurance policy or
other form of credit support;
o any Mortgaged Property or Home Improvement that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or
repossession "REO Property"); and
o 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 the Prospectus Supplement
indicates otherwise, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against the collateral
securing that Series of Notes in the case of a default with respect to that
Series of Notes and may not proceed against any assets of the Depositor or the
related Trust Fund not pledged to secure those 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) that is
specified in the related Prospectus Supplement. The Servicer will service the
Loans pursuant to a Pooling and Servicing Agreement, with respect to a Series of
Certificates or a Servicing Agreement between the Trust Fund and Servicer, with
respect to a Series of Notes.
If the Prospectus Supplement so provides, a Trust Fund relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the Prospectus Supplement pursuant to a trust agreement (each, a
"Trust Agreement") between the Depositor and the Trustee.
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Each Trust Fund, prior to the initial offering of the related Series of
Securities, will have no assets or liabilities. No Trust Fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related Primary Assets and other
assets contemplated in this prospectus and in the related
Prospectus Supplement, and the proceeds thereof;
o to issue the Securities;
o to make payments and distributions on the Securities; and
o to perform 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, as and to the extent the
related Prospectus Supplement specifies.
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 forming a part of the revolving
loans (the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages, primarily on one- to
four-family residential or mixed-use 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 date designated in
the Prospectus Supplement as the cut-off date (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 that 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 under which only the amount of interest that
accrues on the loan during the billing cycle must be paid. 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 to be lower than, or
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similar to, those of traditional fully-amortizing first mortgage loans. 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 first 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 Mortgage Loans. Moreover, the
enforcement of a "due-on-sale" provision (as described below) will have the same
effect as a prepayment of the related Mortgage Loan. See "Certain Legal Aspects
of the Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is
as little as the minimum monthly payment for that 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, fees and charges for that month.
o A borrower may make a payment that is as much as the entire
Principal Balance plus accrued interest and related fees and
charges during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the Mortgage Loans may vary due to seasonal
purchasing and the payment habits of borrowers.
The Mortgage Loans will be secured by "Single Family Properties" (i.e.,
one- to four-family residential housing, including condominium units and
cooperative dwelling units) and mixed-use properties. 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 Single Family 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 dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
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The aggregate Principal Balance of Loans secured by Single Family
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
o a representation by the borrower at origination of the Mortgage
Loan either that the underlying Mortgaged Property will be used by
the borrower for a period of at least six months every year or
that the borrower intends to use the Mortgaged Property as a
primary residence, or
o a finding that the address of the underlying Mortgaged Property is
the borrower's mailing address as reflected in the Servicer's
records.
To the extent specified in the related Prospectus Supplement, Single
Family Properties may include non-owner occupied investment properties and
vacation and second homes.
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 senior or junior Mortgages primarily on Single Family
Properties, or by purchase money security interests in the related Home
Improvements. 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. As used in this prospectus, the term "Property"
includes the Mortgaged Properties and the Home Improvements.
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 under various FHA
programs as authorized under the United States Housing Act of 1937, as amended..
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.
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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 borrower'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
borrower. 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
borrower 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 a Loan upon default for
an amount equal to the principal amount of the 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 the date of foreclosure 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 borrower'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 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
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guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to its 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
guaranteed amount is submitted to the VA after liquidation of the Mortgaged
Property.
The amount payable under a VA guaranty will be the percentage of the
VA- insured loan originally guaranteed by the VA applied to the 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:
o the aggregate unpaid Principal Balance of the Loans;
o the range and weighted average interest rates on the Loans, and,
in the case of adjustable rate Loans, the range and weighted
average of the current interest rates and the lifetime interest
rate caps, if any;
o the range and average Principal Balance of the Loans;
o the weighted average original and remaining terms to stated
maturity of the Loans and the range of original and remaining
terms to stated maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the Loans, as applicable;
o the percentage (by Principal Balance as of the Cut-off Date) of
Loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans;
o 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;
o the geographic distribution of any Mortgaged Properties securing
the Loans;
o for Loans that are secured by Single Family Properties, the
percentage (by Principal Balance as of the Cut-off Date) secured
by shares relating to cooperative dwelling units, condominium
units, investment property and vacation or second homes;
o the lien priority of the Loans;
o the delinquency status and year of origination of the Loans;
o whether such Loans are Closed-End Loans and/or Revolving Credit
Line Loans; and
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o in the case of Revolving Credit Line Loans, the general payments
and credit line terms of those Loans and other pertinent features.
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,
more general or approximate 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 the Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part,
of Private Securities that include:
o pass-through certificates representing beneficial interests in
loans of the type that would otherwise be eligible to be Loans
(the "Underlying Loans") or
o collateralized obligations secured by Underlying Loans.
The pass-through certificates or collateralized obligations will have previously
been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from
a person that is not an affiliate of the issuer of the Private
Securities at the time of sale (nor its affiliate at any time
during the three preceding months) and a period of two years has
elapsed since the date the Private Securities were acquired from
the issuer or from its affiliate, whichever is later.
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 insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (each, 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
o a financial institution or other entity engaged generally in the
business of lending;
o a public agency or instrumentality of a state, local or federal
government; or
o 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 generally will be
limited to certain representations and warranties that
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it makes 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.
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. The 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, 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:
o the total approximate principal amount and type of the Private
Securities to be included in the Trust Fund for that Series;
o certain characteristics of the Underlying Loans, including
(a) the payment features of the 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 the
Underlying Loans insured or guaranteed by a governmental
entity;
(c) the servicing fee or range of servicing fees for the
Underlying Loans;
(d) the minimum and maximum stated maturities of the Underlying
Loans at origination;
(e) the lien priority of the Underlying Loans; and
(f) the delinquency status and year of origination of such
Underlying Loans;
o the maximum original term to stated maturity of the Private
Securities;
o the weighted average term to stated maturity of the Private
Securities;
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o the pass-through or certificate rate or range of rates for the
Private Securities;
o the PS Sponsor, the PS Servicer (if other than the PS Sponsor) and
the PS Trustee for the Private Securities;
o certain characteristics of any credit support such as reserve
funds, security policies or guarantees relating to the Underlying
Loans or to the Private Securities themselves;
o 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
o the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related Prospectus Supplement. If information of the
nature described above for the Private Securities is not known to the Depositor
at the time the Securities are initially offered, more general or approximate
information of a similar nature 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 SEC 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 any cash 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 that may be 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 the Series, a portion of the proceeds of the
sale of the related Securities (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"). In no case will the
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Pre-Funded Amount exceed 50% of the total principal amount of the related
Securities, and in no case will the Pre-Funding Period exceed one year. The
Primary Assets to be purchased generally will be selected on the basis of the
same criteria as those used to select the initial Primary Assets, and the same
representations and warranties will be made with respect to them. 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 the
Series, a portion of the proceeds of the sale of the Securities of the Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of
o the sum of
(i) the amount of interest accrued on the Securities of the
Series and
(ii) if specified in the related Prospectus Supplement, certain
fees or expenses during the Pre-Funding Period,
over
o the amount of interest available 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 so provided 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 the 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
the Prospectus Supplement. Enhancement for a Series may include one or more of
the forms described below, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described in that Prospectus Supplement.
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 Holders of subordinated Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of senior Securities of the same Series, but only to the extent
described in the related Prospectus Supplement.
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INSURANCE
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of pool insurance policies, 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 related Prospectus
Supplement, 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 the 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 the Property, or
(ii) upon transfer of the Property to the special hazard insurer, the
unpaid Principal Balance of the Loan at the time of acquisition
of the 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 the
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 that amount less
any net proceeds from the sale of the Property. Any amount paid as the cost of
repair of the Property will reduce coverage by that 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 clause
(i) in the second previous paragraph is expected to satisfy the condition under
any Pool Insurance Policy that the Property be restored before a claim under the
Pool Insurance Policy may be validly presented with respect to the defaulted
Loan secured by the Property. The payment described under clause (ii) in the
second previous paragraph will render unnecessary presentation of a claim in
respect of the Loan under any Pool Insurance Policy. Therefore, so long as a
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 the Loan.
The amount of the secured debt could be reduced to that value, and the holder of
the Loan thus would become an unsecured creditor to the extent the Principal
Balance of the Loan exceeds
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the value 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" in this prospectus. If the
related Prospectus Supplement so provides, the Depositor or other entity
specified in the Prospectus Supplement will obtain a bankruptcy bond or similar
insurance contract covering losses resulting from proceedings with respect to
borrowers under the Federal 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 the court of
the principal amount of a Loan and will cover certain unpaid interest on the
amount of any 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 Prospectus Supplement for all Loans in the Trust Fund for the
related Series. Such amount will be reduced by payments made under the
bankruptcy bond in respect of the Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If the Prospectus Supplement relating to a Series of Securities so
specifies, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for that Series or for the benefit of
any provider of Enhancement with respect to that 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 in
the amount specified in such Prospectus Supplement. In the alternative or in
addition to such an initial 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 the 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 the related Series, to
pay expenses, to reimburse any provider of Enhancement for the Series 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 provided 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 the
entity will provide certain payments on the Securities of the Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for the Series are not sufficient to make certain payments on the
Securities of the 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 the related 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
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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.
FINANCIAL INSTRUMENTS
If provided in the related Prospectus Supplement, the Trust Fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the Loans and Private
Securities from fixed to floating payments, or from floating to
fixed, or from floating based on a particular index to floating
based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain types
of losses or other payment shortfalls to one or more Classes of
the related Series.
If a Trust Fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related Prospectus Supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the
Primary Assets in a 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 a borrower a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on a Loan.
If the related Prospectus Supplement so provides, 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 borrowers
to pay taxes, assessments, mortgage and hazard insurance policy premiums, and
other comparable items will be deposited. In the case of Loans that do not
require such payments under the related loan documents, the Servicer will not be
required to establish any Escrow Account for those Loans. The Servicer will make
withdrawals from the Escrow Accounts to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to borrowers amounts
determined to be overages, to pay interest to borrowers on balances in the
Escrow Account to the extent required by law, to repair or otherwise protect the
related Property and to clear and terminate such Escrow
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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 the related Prospectus Supplement specifies otherwise, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless the related Prospectus Supplement
provides otherwise, the Collection Account will be an account maintained
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit are rated by each
Rating Agency that rates the related the Securities of that Series
at levels satisfactory to each Rating Agency; or
o 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, all scheduled payments of principal and interest on the Primary
Assets ("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 the Cut-off Date):
(i) All payments in respect of principal, including prepayments, on
the Primary Assets;
(ii) All payments in respect of interest on the 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 fee payable to the Servicer (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 the related Property, whether
through foreclosure sale, repossession or otherwise, including
payments in connection with the Primary Assets received from the
borrower, other than amounts required to be paid or refunded to
the borrower pursuant to the terms of the applicable loan
documents or otherwise pursuant to law, net of related
liquidation expenses (such net amount, the "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 borrower in accordance with
the related Agreement;
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(v) All amounts required to be deposited therein from any Reserve
Fund for the Series pursuant to the related Agreement;
(vi) All advances of cash made by the Servicer in respect of
delinquent Scheduled Payments on a Loan and for any other
purpose as required pursuant to the related Agreement
("Advances"); and
(vii) All repurchase prices of any 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 made by it in connection with
that Series 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 proceeds of insurance
policies covering the related Loans and Mortgaged Properties
("Insurance Proceeds")) that represent late recoveries of
Scheduled Payments with respect to which the Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances that it made in connection with the
Series which the Servicer determines in good faith to be
nonrecoverable from amounts representing late recoveries of
Scheduled Payments respecting which the 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 the Loan next succeeding the date of its receipt of the
Liquidation Proceeds, to pay to itself out of the 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 the 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 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 related REO Property 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;
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(vii) to make payments to the Trustee of the Series for deposit into
the related Distribution Account, if any, or for remittance to
the Holders of the 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, the Servicer may, at any
time, withdraw the amount from the Collection Account.
ADVANCES AND LIMITATIONS ON ADVANCES
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. Its obligation to make Advances 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 Scheduled Payments, Insurance Proceeds or
Liquidation Proceeds respecting which any 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 borrower under each Loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
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, the 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 the Property, to the extent available.
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The standard hazard insurance policies covering Properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times 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, the
coinsurance 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 (i.e.,
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 the Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as their Principal Balances 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 a standard hazard insurance policy in an amount that is
at least equal to the maximum insurable value of the REO Property. No earthquake
or other additional insurance will be required of any borrower or will be
maintained on REO Property other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require the additional
insurance.
Any amounts collected by the Servicer under any those insurance
policies (other than amounts to be applied to the restoration or repair of the
Property, released to the borrower 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 the related 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 the policy absent the deductible clause, to deposit into the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of the 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 that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, 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 that it services. 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 of
the related Loan available to the Holders after reimbursement to itself for its
expenses and (ii) its expenses will be recoverable 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 REO Property by the end of the third
calendar year after the Trust Fund acquires beneficial ownership of the REO
Property. While the holder of an REO Property can often maximize its recovery
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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 borrower on a defaulted Loan a change
in the terms of such Loan to the extent provided in the related Prospectus
Supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meets 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 the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related Loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
Servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the Property has been or is about to be conveyed. Under the
assumption, the transferee of the Property becomes liable under the Loan and the
original borrower is released from liability and the transferee is substituted
as the borrower 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 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 additional 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 a borrower makes a principal prepayment in full between due dates
on the related Loan, the borrower generally will 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
Securities 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 total 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 that it incurs
in connection with the liquidation of defaulted Loans.
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The related Holders will suffer no loss by reason of the Servicer's expenses to
the extent the 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 its
expenses in connection with the restoration of REO Property This right of
reimbursement is prior to the rights of the Holders to receive any related
Insurance Proceeds, Liquidation Proceeds or amounts derived from other
Enhancement. The Servicer generally is 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 Securities of the Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement will provide that, each year, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that the firm has examined
certain documents and records relating to the servicing of the Loans by the
Servicer and that, on the basis of the examination, the firm is of the opinion
that the servicing has been conducted in compliance with the Agreement, except
for (i) such exceptions as the firm believes to be immaterial and (ii) any other
exceptions set forth in the statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement will also provide for delivery to the Trustee of an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under the 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 (defined below) 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, the Events of Default and the rights of a Trustee upon a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights upon Event
of Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the Prospectus Supplement, the Servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related Agreement unless the successor Servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the Trustee;
o has a net worth of not less than the amount specified in the
Prospectus Supplement;
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o would not cause any Rating Agency's rating of the related
Securities in effect immediately prior to the assignment, sale or
transfer to be qualified, downgraded or withdrawn as a result of
the assignment, sale or transfer; and
o executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, that contains an
assumption by the successor Servicer of the due and punctual
performance and observance of each covenant and condition required
to be performed or observed by the Servicer under the Agreement
from and after the date of the agreement.
No 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, the 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 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 Agreement provided that the 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.
However, neither the Servicer nor any such person will be protected against any
breach of warranty or representations made under the Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
the 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 under the
Agreement. 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 under the Agreement or by reason of reckless disregard
of those obligations and duties. In addition, the 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 the
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 Agreement and the rights and duties
of the parties thereto and the interests of the Holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
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, the
provisions or terms are as specified in the related Agreements.
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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 related Trust Fund all right,
title and interest of the Depositor in the Primary Assets and other property to
be transferred to the Trust Fund. Such assignment will include all principal and
interest due on or with respect to the Primary Assets after the Cut-off Date
(except for any retained interests). The Trustee will, concurrently with the
assignment, execute and deliver the Securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will deliver or cause to be delivered to
the Trustee (or, if specified in the Prospectus Supplement, a custodian on
behalf of the Trustee (the "Custodian")), as to each Mortgage Loan, the related
note endorsed without recourse to the order of the Trustee or in blank, the
original mortgage, deed of trust or other security instrument (each, a
"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 those documents in trust for the
benefit of the Holders.
If so specified in the related Prospectus Supplement, at the time of
issuance of the Securities, the Depositor will cause assignments to the Trustee
of the Mortgages relating to the Loans 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, recording is not required to protect the
Trustee's interest in the related Loans. If specified in the Prospectus
Supplement, the Depositor will cause the assignments to be recorded within the
time after issuance of the Securities as is specified in the related Prospectus
Supplement. In this event, the Prospectus Supplement will specify whether the
Agreement requires the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the 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.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or the Custodian), as to each Home Improvement
Contract, the original Home Improvement Contract and copies of related documents
and instruments and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the related Home Improvements. 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" in this prospectus.
Loan Schedule. Each Loan will be identified in a schedule appearing as
an exhibit to the related and will specify with respect to each Loan:
o the original principal amount,
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o its unpaid Principal Balance as of the Cut-off Date,
o the current interest rate,
o the current Scheduled Payment of principal and interest,
o the maturity date, if any, of the related note, and
o 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" in this prospectus. Each Private Security
will be identified in a schedule appearing as an exhibit to the related
Agreement, 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 that:
o the information contained in the Private Securities schedule is
true and correct in all material respects;
o immediately prior to the conveyance of the Private Securities, the
Depositor had good title, and was their sole owner (subject to any
retained interest);
o there has been no other sale by the Private Securities; and
o there is no existing lien, charge, security interest or other
encumbrance (other than any retained interest) on the 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 any other period specified in the related Prospectus
Supplement), the Depositor or Seller will, not later than 90 days (or within
such any 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. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the Primary
Asset;
plus
(b) accrued and unpaid interest to the date of the next Scheduled
Payment on the Primary Asset at the rate set forth in the related
Agreement;
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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 the repurchased 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 the non-conforming 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, the 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, on the date of substitution,
o have 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),
o have an interest rate not less than (and not more than 2% greater
than) the interest rate of the Deleted Primary Asset,
o have a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the Deleted Primary Asset;
and
o 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 the
other 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 the breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or the other entity will be obligated to repurchase the
affected Primary Asset or, if provided in the Prospectus Supplement, provide a
Qualifying Substitute Primary Asset, 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 the non-conforming Primary
Assets. See "Risk Factors--Limited Assets for Making Payments" in this
prospectus.
No Holder of Securities of a Series, solely by virtue of the Holder's
status as a Holder, will have any right under the applicable Agreement to
institute any proceeding with respect to Agreement, unless Holder previously has
given to the Trustee for the Series written notice of default and unless the
Holders of Securities evidencing not less than 51% of the aggregate voting
rights of the Securities of the Series
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have made written request upon the Trustee to institute the proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee 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 the
Securities following the distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on the Securities;
(iii) the amount of
(a) any overdue accrued interest included in such
distribution,
(b) any remaining overdue accrued interest with respect to
the 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
the distribution,
(b) any remaining overdue principal amounts with respect to
the 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 the Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under the 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
the calendar year:
o the total of the amounts reported pursuant to clauses (i), (ii)
and (iv)(d) above for the calendar year, and
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o the information specified in the related Agreement to enable
Holders to prepare their tax returns including, without
limitation, the amount of any original issue discount accrued on
the Securities.
Information in the Distribution Date Statements and annual statements
provided to the Holders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the Trustee
a report by independent public accountants with respect to its servicing of the
Loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the Prospectus Supplement, the related Series of
Securities (or one or more Classes of the Series) will be issued in book-entry
form. In that event, owners of beneficial interests in those Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The 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 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
o any failure by the Servicer to deposit amounts in the Collection
Account and Distribution Account(s) to enable the Trustee to
distribute to Holders of Securities of the Series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement
after the giving of written notice to the Servicer by the Trustee,
or to the Servicer and the Trustee by Holders having not less than
25% of the total voting rights of the Series;
o any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Agreement provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement
after the giving of written to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Holders having not less than
25% of the total voting rights of the of the Series; and
o 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 or Holders
of Securities of the Series having not less than 51% of the total voting rights
of the 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 the 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 the 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 the 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
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specified in the related Prospectus Supplement to act as successor Servicer
under the provisions of the 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 the Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee 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 Securities of the Series, and, unless otherwise
specified in the related Prospectus Supplement, Holders of Securities having not
less than 51% of the total voting rights of the Series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon the Trustee. However,
the Trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the Holders have offered the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the Trustee as a result. The Trustee may
decline to follow any such direction if it 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:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture, provided that the failure continues
for a period of sixty (60) days after notice is given in
accordance with the procedures described in the related Prospectus
Supplement;
o any representation or warranty made by the Depositor or the Trust
Fund in the Indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to
or affecting such Series having been incorrect in a material
respect as of the time made, provided that the breach is not cured
within sixty (60) days after notice is given in accordance with
the procedures described in the related Prospectus Supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; and
o any other Event of Default specified with respect to Notes of that
Series.
If an Event of Default with respect to the then-outstanding Notes of
any Series occurs and is continuing, either the Indenture Trustee or the Holders
of a majority of the total amount of those Notes may declare the principal
amount of all the Notes of the Series (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the related Prospectus Supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the Holders of a majority of the total amount of those Notes.
If, following an Event of Default with respect to any Series of Notes,
the related Notes have been declared to be due and payable, the Indenture
Trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the Notes as they would have
become due if there had not been 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
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(other than a default in the payment of any principal of or interest on any Note
of the Series for thirty (30) days or more), unless:
(a) the Holders of 100% of the total amount of the then-outstanding
Notes of the Series consent to such sale;
(b) the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding Notes of the Series at the date of sale; or
(c) the Indenture Trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the Notes
as such payments would have become due if the Notes had not been
declared due and payable, and the Indenture Trustee obtains the
consent of the Holders of 66 2/3% of the total amount of the
then-outstanding Notes of the 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
liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an Event of Default of this type, 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 that the principal of the Notes of a Series is declared due and payable as
described above, Holders of the Notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those Notes less the amount of the discount that remains 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 its rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of the Series, unless the
Holders offer security or indemnity satisfactory to the Indenture Trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of
amount of the then-outstanding Notes of the 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 those Notes, and the Holders of a majority
of the amount of the amount of the then- outstanding Notes of the Series may, in
certain cases, waive any default with respect to the Notes, 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 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 an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee
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by the related Agreement will be conferred or imposed upon that Trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by their appointment; provided, however, that the
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 the Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, the
Trustee will not be responsible for the accuracy or content of any such
documents furnished to it by the Holders or the Servicer under the Agreement.
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 that Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if that Trustee becomes insolvent or
(iii) by the Holders of Securities having more than over 50% of the total voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Depositor. Any resignation or removal of a Trustee and appointment of
a successor Trustee will not become effective until the successor Trustee
accepts its appointment.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the Trustee, 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,
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(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, however, that any such amendment (other than pursuant to clause (vi)
above) will not adversely affect in any material respect the interests of any
Holders of the Series, as evidenced by an opinion of counsel delivered to the
Trustee. Unless otherwise specified in the Prospectus Supplement, any such
amendment shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
applicable Rating Agency rating that the amendment will not cause the Rating
Agency to reduce its then-current rating.
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 the consent of the Holders possessing not
less than 66 2/3% of the total outstanding principal amount of the Securities of
the Series (or, if only certain Classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected Class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Agreement, or modifying in any manner the rights of
Holders of the Series. In no event, however, shall any such amendment
(a) reduce the amount or delay the timing of payments on any Security
without the consent of the Holder of the Security; or
(b) reduce the aforesaid percentage of the total 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 total outstanding principal amount of
each affected Class.
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 Trustee will afford them access during
business hours to the most recent list of Holders of that Series held by the
Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
BOOK-ENTRY SECURITIES
If specified in the related Prospectus Supplement for a Series of
Securities, the Securities (or one or more Classes of the Securities) may be
issued in book-entry form. In that event, beneficial owners of those 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.
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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 the Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
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 that 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 the Series.
In addition to such discharge with certain limitations, , if so
specified with respect to the Notes of any Series, the Indenture will provide
that the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of that Series (except for certain obligations relating to
temporary Notes and exchange of Notes, registration of the transfer or exchange
of those Notes, replacing stolen, lost or mutilated Notes, to, maintaining
paying agencies and holding 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 accordance with their terms, will provide money in
an amount sufficient to pay the principal of and each installment of interest on
those Notes on the Final Scheduled Distribution Date for the Notes and any
installment of interest on the Notes in accordance with the terms of the
Indenture and the Notes. In the event of any such defeasance and discharge of
Notes of a Series, Holders of Notes of that 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 legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or reflect
the laws of any particular state, or 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 that 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
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liens pursuant to the laws of the jurisdiction in which the mortgaged property
is located. Priority with respect to the 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, 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 its rights in a
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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 the 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
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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 enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which 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 ACA
specifies 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 ACA states 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 ACA also specifies 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.
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The ACA also specifies 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 ACA specifically addresses 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
of 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 the 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.
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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 the personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, 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 of 1940 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 rehabilitation plan under chapter 13 of the federal bankruptcy code to
cure a monetary default with respect to a loan on his residence by paying
arrearages within a reasonable time period and reinstating the
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original loan payment schedule even though the lender accelerated the loan and
the lender has taken all steps to realize upon its 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 federal 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
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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
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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, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (the "UCC") in effect in the applicable
jurisdiction. 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 Home
Improvement Contracts to the Trustee or 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 Home Improvement 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 Home
Improvement Contracts without notice of such assignment, the Trustee's interest
in the contracts could be defeated.
Security Interests in Home Improvements
The Home Improvement 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. Purchase money security interests of
this type 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 the 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 Home
Improvement Contract by voluntary surrender, by "self-help" repossession that is
"peaceful" (i.e., without breach of the peace) or, in the absence of
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voluntary surrender and the ability to repossess without breach of the peace, by
judicial process. The holder of a Home Improvement 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 the 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 the contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of the 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 Home Improvement 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
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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 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 those 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
related loss may reduce the amounts available to be paid to the Holders of the
related Securities. Unless otherwise specified in the related Prospectus
Supplement, any shortfalls in interest collections on Loans (or Underlying
Loans), 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 the 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 the interest shortfall not occurred.
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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"). The
Depositor Securities must be collateralized or otherwise secured or backed by,
or otherwise represent 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, In connection therewith or otherwise, the depositor may purchase,
acquire, own, hold, transfer, convey, service, sell, pledge, assign, finance and
otherwise deal 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
those 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:
o to purchase the related Primary Assets,
o to repay indebtedness incurred to obtain funds to acquire such
Primary Assets,
o to establish any Reserve Funds described in the related Prospectus
Supplement and
o to pay costs of structuring and issuing the Securities, including
the costs of obtaining any Enhancement.
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, Morgan, Lewis &
Bockius LLP or such other counsel so designated in the Prospectus Supplement,
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
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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
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, any state thereof or the
District of Columbia (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
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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. Although the
matter is not free from doubt, the Trustee intends to treat interest on such
Debt Securities as unconditionally payable and as constituting 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 longer than the interval between subsequent Distribution Dates, the
greater of (i) the interest foregone and (ii) the excess of the stated principal
amount over the issue price will be included in the stated redemption price at
maturity and tested under the de minimis rule described below. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is shorter than the interval between subsequent Distribution Dates, all
of the additional interest 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
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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 at
maturity.
The Internal Revenue Service (the "IRS") 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.
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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
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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
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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.
On December 30, 1997, the IRS issued final regulations (the
"Amortizable Bond Premium Regulations") dealing with amortizable bond premium.
The regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6). Absent further guidance from the IRS, the Trustee
intends to account for amortizable bond premium in the manner described above.
Prospective Purchasers of the Debt Securities should consult their tax advisors
regarding the possible application of the Amortizable Bond Premium Regulations.
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
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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. Qualification as a
REMIC requires ongoing compliance with certain conditions. Although a REMIC is
not generally subject to federal income tax, the Code provides that failure to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of restrictions on the
purchase and transfer of the residual interests in a REMIC as described below
under "Taxation of Owners of Residual Interest Securities", would cause the
Trust not to be treated as a REMIC for such year and thereafter. In that event,
such entity may be taxable as a separate corporation and the related
certificates may not be accorded the status or given the tax treatment described
below.
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
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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
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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. A Holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate increased by
the taxable income of the REMIC that was included in the income of such Residual
Certificate Holder and decreased by distributions received thereon by such
Residual Certificateholder. 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. In that event, the loss will be used to increase such Residual
Interest Security Holder's adjusted basis in the newly acquired asset.
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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 of 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
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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. Such a purpose exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee would
be unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC. However, a safe harbor exists under which a transferor is presumed to
lack such knowledge provided that two conditions are met: (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee had
historically paid its debts as they became due and found no significant evidence
to indicate that the transferee will not continue to pay its debts as they
become due, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, it may
incur tax liabilities in excess of any cash flows generated by the interest and
that it intends to pay taxes associated with holding the residual interest as
they become due.
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. 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."
Proposed Treasury regulations issued on February 4, 2000 (the "New
Proposed Regulations") would add a third condition to the safe harbor under
which transfers of noneconomic residual interests would not be disregarded for
federal income tax purposes. Under the New Proposed Regulations, a transfer of a
noneconomic residual interest will qualify under this safe harbor only if the
present value of the anticipated tax liabilities associated with holding the
residual interest does not exceed the present value of the sum of (i) any
consideration given to the transferee to acquire the interest, (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value generally is calculated using a discount rate
equal to the applicable federal rate. The New Proposed Regulations have a
proposed effective date of February 4, 2000.
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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
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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
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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.
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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, 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 more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
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.
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
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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
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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
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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-8BEN 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
foreign person that owns the Note should furnish such organization or
institution with a Form W-8BEN or a similar form. The organization or
institution may then be required to forward the Form W-8BEN to the withholding
agent. 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.
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
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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.
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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
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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,
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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-8BEN or a similar
form, 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
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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.
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") effective on September 1, 1997. On February 4, 2000, the IRS and
Treasury issued proposed Treasury regulations on FASITs. The regulations
generally would not be effective until final regulations are filed with the
federal register. However, it appears that certain anti-abuse rules would apply
as of February 4, 2000. 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.
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However, the qualification as a FASIT of any Trust Fund for which a
FASIT election is made (a "FASIT Trust") depends on the trust's ability to
satisfy the requirements of the FASIT provisions on an ongoing basis, including,
without limitation, the requirements of any final Treasury regulations that may
be promulgated in the future under the FASIT provisions or as a result of any
change in applicable law. Thus, no assurances can be made regarding the
qualification as a FASIT of any FASIT Trust for which a FASIT election is made
at any particular time after the issuance of securities by the FASIT Trust.
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 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."
Anti-Abuse Rule. Under proposed Treasury regulations, the Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a
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principal purpose of forming or using the FASIT is to achieve results
inconsistent with the intent of the FASIT provisions and the FASIT regulations.
This determination would be based on all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT Trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT Trust will be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT (the "New Arrangement") is determined
under general federal income tax principles. The holder of the FASIT Ownership
Security is treated as exchanging the New Arrangement's assets for an amount
equal to their value and gain recognized is treated as gain from a prohibited
transaction that is subject to the 100 percent tax, without exception. Loss, if
any, is disallowed. In addition, the holder of the FASIT Ownership Security must
recognize cancellation of indebtedness income, on a regular interest by regular
interest basis, in an amount equal to the adjusted issue price of each FASIT
Regular Security outstanding immediately before the cessation over its fair
market value. If the holder of the FASIT Ownership Security has a continuing
economic interest in the New Arrangement, the characterization of this interest
is determined under general federal income tax principles. Holders of FASIT
Regular Securities are treated as exchanging their Securities for interests in
the New Arrangement, the classification of which is determined under general
federal income tax principles. Gain is recognized to the extent the new interest
either does not qualify as debt or differs either in kind or extent. The basis
of the interest in the New Arrangement equals the basis in the FASIT Regular
Security increased by any gain recognized on the exchange.
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."
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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
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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.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT Regular Security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT Regular Security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person regular interest holder is (1) a "10 percent shareholder" of the debtor,
(2) a "controlled foreign corporation" and the debtor is a related person with
respect to the controlled foreign corporation or (3) related to the debtor. As
set forth above, the proposed Treasury regulations would not be effective until
final regulations are filed with the federal register.
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 the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 4975
of 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 and Section 4975 of the Code impose requirements on employee
benefit plans and on certain other retirement plans and arrangements, including
certain 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 or to Section
4975 of the Code and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires in general 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 discretionary authority or
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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 Section 3(32) of ERISA) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA),
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 law. Any such plan that
is qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
On January 5, 2000, the United States Department of Labor (the "DOL")
issued final regulations under Section 401(c) of ERISA describing a safe harbor
for insurers that issued certain nonguaranteed policies supported by their
general accounts to Plans, and under which an insurer would not be considered an
ERISA fiduciary with respect to its general account by virtue of a Plan's
investment in such a policy. In general, to meet the safe harbor, an insurer
must (a) disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis; (b) allow Plans to terminate or discontinue a
policy on 90 days' notice to the insurer, and to elect, without penalty, (i) a
lump-sum payment, or (ii) annual installment payments over a ten-year period,
with interest; and (c) give Plans written notice of "insurer-initiated
amendments" 60 days before the amendments take effect.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan, and
impose additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan. Certain Parties in Interest that participate in a
prohibited transaction may be subject to excise taxes imposed pursuant to
Section 4975 of the Code, or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory, regulatory or administrative exemption is available.
On November 13, 1986, the DOL issued final regulations (Labor Reg.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan (the "Plan Asset Regulation"). Under this regulation, the underlying
assets and properties of corporations, partnerships, trusts 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,
unless certain exceptions apply.
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, the Underwriter 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 Backup Servicer, the Indenture Trustee, the Owner Trustee, the
Underwriter, 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.
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In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of certificates of the Trust Fund, 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 a 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." There can be no assurance that any of
these class exemptions will apply with respect to any particular Plan's
investment in Notes, or, even if it did apply, that any exemption would apply to
all prohibited transactions that may occur in connection with such an
investment. 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.
The Plan Asset 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, or if equity participation by
benefit plan investors is not significant. In general, a publicly-offered
security, as defined in the Plan Asset Regulation, is a security that is widely
held, freely transferable and registered under the Exchange Act. Equity
participation in an entity by benefit plan investors is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
"benefit plan investors," which include benefit plans described in ERISA or
under Section 4975 of the Code, whether or not they are subject to ERISA, as
well as entities whose underlying assets include assets of a Plan by reason of a
Plan's investment in the entity.
If no exception under the Plan Asset Regulation applies and if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the Trust Fund, then the assets of the
Trust Fund would be considered to be assets of the Plan. Because the Loans held
by the Trust Fund may be deemed Plan assets of each Plan that purchases an
equity interest, an investment in the equity interests by a Plan might be a
prohibited transaction under Sections 406 and 407 of ERISA and subject to an
excise tax under Section 4975 of the Code and may cause transactions undertaken
in the course of operating the Trust Fund to constitute prohibited transactions,
unless a statutory or administrative exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)) (the
"Underwriter Exemption"), which exempts from the application of certain of the
prohibited transaction rules transactions relating to the acquisition, sale and
holding by Plans of certain certificates representing an interest in
asset-backed pass-through trusts that hold certain types of receivables or
obligations and with respect to which Bear, Stearns & Co. Inc. is the
underwriter, or the manager or co-manager of an underwriting syndicate.
The Underwriter Exemption sets forth the following general conditions
which must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a transaction in
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connection with the servicing, operation and management of the Trust Fund may be
eligible for exemptive relief thereunder:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for such certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the same trust fund, other than in the case of a "Designated
Transaction" (as defined below);
(3) The certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case of a
Designated Transaction, four) highest generic rating categories from any of
Fitch IBCA, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group (each, a "rating agency");
(4) The trustee is not an affiliate of the underwriters, the depositor,
the servicers, any borrower whose obligations under one or more mortgage loans
constitute more than 5% of the aggregate unamortized principal balance of the
assets in the trust, or any of their respective affiliates (together with the
trustee, the "Restricted Group");
(5) The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting or placing such certificates; the sum
of all payments made to and retained by the Depositor pursuant to the sale of
the mortgage loans to the trust represents not more than the fair market value
of such mortgage loans; and the sum of all payments made to and retained by the
servicers represent not more than reasonable compensation for the servicers'
services under the pooling and servicing agreements and reimbursement of the
servicers' reasonable expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
For purposes of the Underwriter Exemption, "Designated Transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are secured by single-family residential,
multi-family residential, commercial real property or leasehold interests
therein.
Moreover, the Underwriter Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor, provided
that, among other requirements: (i) such person (or its affiliate) is not an
obligor with respect to more than five percent of the fair market value of the
obligations or receivables contained in the trust; (ii) the Plan is not a plan
with respect to which any member of the Restricted Group is the "plan sponsor"
(as defined in Section 3(16)(B) of ERISA); (iii) in the case of an acquisition
in connection with the initial issuance of certificates, at least fifty percent
of each class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least fifty percent of the
aggregate interest in the trust fund is acquired by persons independent of the
Restricted Group; (iv) a Plan's investment in certificates of any class does not
exceed twenty-five percent of all of the certificates of that class outstanding
at the time of the acquisition; and (v) immediately after the acquisition, no
more than twenty-five percent of the
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assets of any Plan with respect to which such person has discretionary authority
or renders investment advice are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemption (Prohibited Transaction Exemption 97-34,
62 Fed. Reg. 39021 (1997)), 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 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 "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 "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 a rating agency; provided that the terms and
conditions for determining the eligibility of an obligation
may be changed if such changes receive prior approval either
by a majority vote of the outstanding certificateholders or
by a rating agency.
(3) The transfer of such additional obligations to the trust
during the Funding Period must not result in the certificates
to be covered by the Exemption receiving a lower credit
rating from a rating agency upon termination of the Funding
Period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust.
(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 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 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
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were applicable to the obligations transferred to
the trust as of the closing date.
(6) The period of pre-funding 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.
(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 period of pre-funding;
(iii) the percentage and/or dollar amount of the Funding
Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the 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.
On November 13, 2000, the DOL published in the Federal Register an
amendment (the "November, 2000 Amendment") to the Underwriter Exemption (65 Fed.
Reg. 67765 (2000)) that, effective as of August 23, 2000, permits Plans to
purchase subordinated certificates rated in any of the four highest ratings
categories (provided that all other requirements of the Underwriter Exemption
are met).
In general, neither PTCE 83-1, which exempts certain transactions
involving plan investments in mortgage trusts, nor the Underwriter Exemption
applies to a trust which contains unsecured obligations. However, the November,
2000 Amendment provides that, for purposes of the Underwriter Exemption,
residential and home equity loan receivables issued in Designated Transactions
may be less than fully secured if (i) the rights and interests evidenced by the
certificates issued in the Designated Transaction are not subordinated to the
rights and interests evidenced by other certificates of the same trust fund,
(ii) the certificates have received a rating at the time of acquisition that is
in one of the two highest generic rating categories from a rating agency, and
(iii) such receivables are secured by collateral whose fair market value on the
closing date of the Designated Transaction is at least 80% of the sum of (A) the
outstanding principal balance due under the receivable and (B) the outstanding
principal balance of any other receivable of higher priority which is secured by
the same collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the Underwriter Exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
such investment. Moreover, each Plan fiduciary should determine whether under
the general
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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, New York, New York or Morgan, Lewis
& Bockius LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed for each Series of Securities. 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.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. 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 SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes Securities, the Depositor will provide or cause to be
provided without charge a copy of any of the documents and/or reports
incorporated herein by reference, in each case to the extent the documents or
reports relate to such Classes of Securities, other than the exhibits to such
documents (unless those exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to:
Bear Stearns Asset Backed Securities Inc., 245 Park Avenue, New York, New York
10167, Telephone number (212) 272-4095 . The Depositor has determined that its
financial statements are not material to the offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference
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Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a
website at http://www.sec.gov containing reports, proxy and information
statements and other information regarding issuers, including each Trust Fund,
that file electronically with the SEC.
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.
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LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Enhancement Act. 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.
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INDEX OF DEFINED TERMS
additional obligations........................................................84
Advances......................................................................27
Agreements.....................................................................8
Amortizable Bond Premium Regulations..........................................59
Asset Value...................................................................10
Assumed Reinvestment Rate.....................................................10
Available Interest Amount.....................................................11
Capitalized Interest Account..................................................22
Cash Flow Bond Method.........................................................67
CERCLA........................................................................45
Certificates...................................................................8
Class..........................................................................9
Closed-End Loans..............................................................14
Code..........................................................................12
Collection Account.........................................................9, 26
Contingent Payment Regulations................................................56
Custodian.....................................................................33
Cut-off Date..................................................................14
Debt Securities...............................................................55
Deleted Primary Asset.........................................................35
Depositor......................................................................8
Depositor Securities..........................................................53
Disqualified Organization.....................................................63
Distribution Account...........................................................9
Distribution Date..............................................................9
DOL...........................................................................81
Eligible Investments..........................................................21
Enhancement...............................................................13, 22
EPA...........................................................................45
ERISA.........................................................................80
Escrow Account................................................................25
Events of Default.........................................................37, 38
excess servicing fee..........................................................66
FASIT.........................................................................54
FASIT Qualification Test......................................................77
FASIT Securities..............................................................76
FASIT Trust...................................................................76
FHA...........................................................................16
Final Mark-to-Market Regulations..............................................65
Final Scheduled Distribution Date.............................................11
foreign person................................................................71
Funding Limit.................................................................84
Funding Period................................................................84
Garn-St. Germain Act..........................................................48
High-Yield Interest...........................................................77
Holder.........................................................................9
Holders.......................................................................41
Home Improvement Contracts................................................10, 16
Home Improvements.........................................................10, 16
HUD...........................................................................17
Indenture......................................................................8
Installment Sales Contract....................................................51
Insurance Proceeds............................................................27
Interest Weighted Securities..................................................58
IRS...........................................................................56
Liquidation Proceeds..........................................................26
Loans.........................................................................10
market discount...............................................................58
Mortgage......................................................................33
Mortgage Loans.................................................................9
New Arrangement...............................................................78
new partnership...............................................................73
New Proposed Regulations......................................................64
Nonresidents..................................................................68
Notes..........................................................................8
OID...........................................................................55
OID Regulations...............................................................55
old partnership...............................................................73
OTS...........................................................................49
Parties in Interest...........................................................81
Pass-Through Securities.......................................................65
Pay-Through Security..........................................................57
Plan Asset Regulation.........................................................81
Plans.........................................................................80
Pool Insurance Policy.........................................................23
Pooling and Servicing Agreement................................................8
Pre-Funded Amount.............................................................21
Pre-Funding Account...........................................................21
Pre-Funding Period............................................................21
Prepayment Assumption.........................................................57
Primary Assets.................................................................9
Private Securities............................................................10
prohibited transactions.......................................................80
Property......................................................................16
PS Agreement..................................................................19
PS Servicer...................................................................19
PS Sponsor....................................................................19
PS Trustee....................................................................19
PTCE..........................................................................82
Qualifying Substitute Primary Asset...........................................35
Rating Agency..............................................................9, 87
Ratio Strip Securities........................................................66
Regular Interest Securities...................................................54
Regular Interests.............................................................59
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REMIC.....................................................................12, 54
REO Property..................................................................13
Reserve Fund...............................................................9, 24
Residual Interest Security....................................................61
Residual Interests............................................................59
Revolving Credit Line Loans...................................................14
Revolving Mortgage Loans......................................................14
Scheduled Payments............................................................26
Securities.....................................................................8
Seller.........................................................................8
Servicing Fee.............................................................26, 65
Short-Term Note...............................................................70
Single Family Property........................................................15
Special Redemption Date.......................................................11
Stripped Securities...........................................................65
Tax Counsel...................................................................53
TIN...........................................................................68
Title V.......................................................................49
Trust Agreement............................................................8, 13
Trust Fund.....................................................................8
Trustee........................................................................8
U.S. Person...................................................................54
UCC...........................................................................50
Underlying Loans..........................................................10, 19
Underwriter Exemption.........................................................82
VA............................................................................16
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriters. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this prospectus supplement or the prospectus.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Table of Contents....................................................... S-iii
Summary................................................................. S-1
Risk Factors............................................................ S-3
Transaction Overview.................................................... S-5
The Mortgage Loan Pool.................................................. S-7
The Originators, the Seller and the Servicer............................ S-14
The Owner Trustee....................................................... S-24
The Indenture Trustee and the Collateral Agent.......................... S-24
Description of the Notes and the Trust Certificates..................... S-25
Servicing of the Mortgage Loans......................................... S-38
The Policy.............................................................. S-44
The Note Insurer........................................................ S-45
Prepayment and Yield Considerations..................................... S-47
Certain Federal Income Tax Considerations............................... S-50
ERISA Considerations.................................................... S-51
Legal Investment........................................................ S-52
Plan of Distribution.................................................... S-52
Incorporation of Certain Information by Reference....................... S-53
Additional Information.................................................. S-54
Experts................................................................. S-54
Legal Matters........................................................... S-54
Ratings................................................................. S-54
Glossary................................................................ S-55
PROSPECTUS
Risk Factors............................................................ 3
Description of the Securities........................................... 8
The Trust Funds......................................................... 13
Enhancement............................................................. 22
Servicing of the Loans.................................................. 25
The Agreements.......................................................... 32
Certain Legal Aspects of the Loans...................................... 42
The Depositor........................................................... 53
Use of Proceeds......................................................... 53
Certain Federal Income Tax Considerations............................... 53
State Tax Considerations................................................ 76
FASIT Securities........................................................ 76
ERISA Considerations.................................................... 80
Legal Matters........................................................... 86
Financial Information................................................... 86
Available Information................................................... 86
Incorporation of Certain Information by Reference ...................... 86
Rating.................................................................. 87
Legal Investment........................................................ 88
Plan of Distribution.................................................... 88
Index of Defined Terms.................................................. 89
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$275,000,000
[GRAPHIC OMITTED] (R)
ABFS MORTGAGE LOAN TRUST 2000-4
Issuer
AMERICAN BUSINESS CREDIT, INC.
Servicer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
$275,000,000
CLASS A NOTES
MORTGAGE-BACKED NOTES
SERIES 2000-4
-----------------
PROSPECTUS SUPPLEMENT
-----------------
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
DECEMBER 6, 2000
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