<PAGE> 1
PROSPECTUS
$912,000,000 CLASS A-1 NOTES
$ 48,000,000 CLASS A-2 NOTES
$ 90,000,000 CLASS A-3 NOTES
HOUSEHOLD CONSUMER LOAN TRUST 1997-2
HOUSEHOLD CONSUMER LOAN ASSET BACKED NOTES, SERIES 1997-2
HOUSEHOLD FINANCE CORPORATION
SERVICER ---------------------------
The Household Consumer Loan Trust 1997-2 (the "Issuer") will be formed pursuant
to a Trust Agreement, to be dated as of November 1, 1997 (the "Trust
Agreement"), between Household Consumer Loan Corporation (the "Seller") and
Chase Manhattan Bank Delaware, as owner trustee (the "Owner Trustee") and will
issue four classes of Consumer Loan Asset Backed Notes (collectively, the
"Notes") pursuant to an Indenture to be dated as of November 1, 1997 (the
"Indenture") between the Issuer and The Bank of New York, as indenture trustee
(the "Indenture Trustee"). The Issuer will also issue the Consumer Loan Asset
Backed Certificates, Series 1997-2 (the "Certificates"). The Notes and
Certificates will be issued with aggregate principal amounts as set forth
herein. Only the Class A-1, Class A-2 and Class A-3 Notes (the "Class A Notes")
are offered by this Prospectus. The Class B Notes and the Certificates will be
sold privately to qualified institutional buyers or accredited investors (which
may include an affiliate of the Seller), and unless otherwise registered with
the Commission (as defined herein), any resale of such securities will be made
to qualified institutional buyers or to accredited investors. The Notes and the
Certificates are collectively referred to herein as the "Series 1997-2
Securities". The Class A-2, Class A-3, Class B Notes and the Certificates are
subordinated to the extent described herein.
The Notes will be secured by a participation interest (the "Series 1997-2
Participation") in receivables held by Household Consumer Loan Deposit Trust I
(the "Deposit Trust") and originated under certain fixed and variable rate
revolving consumer credit lines (the "Credit Lines") and the collections
thereon. The Deposit Trust was formed pursuant to a Pooling and Servicing
Agreement dated as of September 1, 1995 among the Seller, Household Finance
Corporation, as Servicer (the "Servicer") and The Chase Manhattan Bank, N.A., as
trustee. Texas Commerce Bank National Association has succeeded The Chase
Manhattan Bank, N.A., as trustee under the Pooling and Servicing Agreement and
is referred to herein as the "Deposit Trustee".
Interest will accrue on the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes
at floating rates equal to LIBOR (as defined herein) plus 0.18%, 0.29% and 0.40%
per annum, respectively, in each case, subject to certain limitations as
described herein. See "Description of the Securities -- Distributions on the
Securities" herein. Payments of interest and principal on the Notes will be made
on the fifteenth day of each month, or if any such day is not a Business Day, on
the next succeeding Business Day, commencing in December 1997 (each, a "Payment
Date").
There is currently no secondary market for the Notes. There can be no assurance
that a secondary market for the Notes will develop or, if it does develop, that
it will continue. Application will be made to list the Class A Notes on the
Luxembourg Stock Exchange. See "Risk Factors -- Limited Liquidity" herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES,
SEE "RISK FACTORS" ON PAGE 21 HEREIN.
---------------------------
THE NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF HOUSEHOLD CONSUMER LOAN CORPORATION, HOUSEHOLD
FINANCE CORPORATION, THE DEPOSIT TRUSTEE, THE OWNER TRUSTEE, THE INDENTURE
TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT DESCRIBED HEREIN. NONE OF
THE NOTES, THE SERIES 1997-2 PARTICIPATION, OR THE CREDIT LINES ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) SELLER(2)(3)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Per Class A-1 Note........................... 100% 0.175% 99.825%
- ---------------------------------------------------------------------------------------------------------------------
Per Class A-2 Note........................... 100% 0.400% 99.600%
- ---------------------------------------------------------------------------------------------------------------------
Per Class A-3 Note........................... 100% 0.475% 99.525%
- ---------------------------------------------------------------------------------------------------------------------
Total........................................ $1,050,000,000 $ 2,215,500 $1,047,784,500
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from November 19, 1997.
(2) The Seller and Household Finance Corporation have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(3) Before deducting expenses, estimated to be $950,000.
---------------------------
The Class A Notes are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of such Class A Notes will be made in book-entry form only through the
facilities of The Depository Trust Company, Cedel Bank, societe anonyme and the
Euroclear System on or about November 19, 1997.
---------------------------
J.P. MORGAN & CO.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SALOMON BROTHERS INC
---------------------------
The date of this Prospectus is November 7, 1997.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, THE CLASS A NOTES IN THE OPEN MARKET. SEE
"UNDERWRITING."
Until 90 days after the date of this Prospectus, all dealers effecting
transactions in the Class A Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions. Upon receipt of a
request by an investor, or his or her representative, within the period during
which there is a Prospectus delivery obligation, the Underwriters will transmit
or cause to be transmitted promptly, without charge and in addition to any such
delivery requirements, a paper copy of a Prospectus or, provided certain
procedural requirements are satisfied, a Prospectus in an electronic format.
The address and telephone number of the Seller, the originator of the
Deposit Trust, is 1111 Town Center Drive, Las Vegas, Nevada 89134, (702)
243-1347. The address and telephone number of the Owner Trustee to the Issuer is
1201 Market Street, Wilmington, Delaware 19801, (302) 428-3375.
AVAILABLE INFORMATION
The Seller, has filed a Registration Statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission (the "Commission")
with respect to the Notes offered pursuant to this Prospectus. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information included in the Registration Statement and the exhibits thereto. For
further information, reference is made to the Registration Statement and
amendments thereof and to exhibits thereto, which are available for inspection
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission at Seven
World Trade Center, New York, New York 10048 and at 500 W. Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of the Registration Statement, the
amendments thereof and the exhibits thereto, may be obtained from the Public
Reference Section of the Commission's Washington Offices and while the Class A
Notes are listed on the Luxembourg Stock Exchange, at the offices of the
Luxembourg Paying Agent (as defined herein), in each case, at prescribed rates.
The Commission also maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission on behalf of the Issuer pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), on or subsequent to the date of this Prospectus and
prior to the termination of the offering of the Class A Notes made hereby shall
be deemed to be incorporated by reference herein and to be a part of this
Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or replaces such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Prospectus. The Seller will provide without charge to
each person to whom this Prospectus is delivered, on the request of such person,
a copy of any or all of the documents incorporated herein by reference (other
than exhibits to such documents unless the exhibits are specifically
incorporated by reference in such documents). Requests should be directed in
writing to Household Consumer Loan Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Secretary. While the Class A Notes are
listed on the Luxembourg Stock Exchange, copies may also be obtained at the
offices of the Luxembourg Stock Exchange.
FINANCIAL INFORMATION
The Seller has determined that its financial statements are not material to
the offering made hereby.
The Issuer will be formed to hold the Series 1997-2 Participation and to
issue the Notes and Certificates. The Issuer will have no assets or obligations
prior to the issuance of the Notes and will engage in no activities other than
those described herein. Accordingly, no financial statements with respect to the
Issuer are included in this Prospectus.
REPORTS TO THE NOTEHOLDERS
Unless and until Replacement Notes (as defined herein) are issued, the
Issuer will provide monthly and annual reports concerning the Notes to CEDE &
Co., as nominee of The Depository Trust Company ("DTC") and registered holder of
the Notes, the Luxembourg Paying Agent, if any, and upon request, to
Participants (as defined herein). See "Description of the Securities -- Reports
to Noteholders" and "Description of the Deposit Trust -- Evidence as to
Compliance" herein. Such reports may be made available to the owners of the
Notes (the "Note Owners") upon request to their Participants. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. The Issuer does not intend to provide any
financial information to any holder of the Notes which has been examined and
reported upon, with an opinion expressed, by an independent public accountant.
The Servicer will file with the Commission such periodic reports with respect to
the Issuer as are required by the 1934 Act, and the rules, regulations or orders
of the Commission thereunder.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
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<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 21
Limited Liquidity............................ 21
Difficulty in Pledging....................... 21
Potential Delays in Receipt of
Distributions.............................. 21
Nature of Underlying Assets.................. 21
Cash Flow Considerations..................... 21
Prepayment Considerations.................... 22
Note Rating.................................. 22
Changes in Loan Terms and Finance Charges.... 22
Discounted Principal Receivables............. 22
Sale of Assets; Insolvency Considerations.... 23
Legal Considerations......................... 24
Generation of Additional Receivables;
Dependency on Borrower Repayments.......... 25
Series 1997-2 Participation.................. 25
Social, Legal, Economic and Other Factors.... 25
Deposit Trust Risk Factors..................... 25
Issuance of Additional Series; Voting
Power...................................... 25
Addition of Assets to the Deposit Trust...... 26
The Seller and Subservicers.................... 27
The Servicer................................... 27
Use of Proceeds................................ 28
The HFC Revolving Consumer Credit Lines........ 28
General...................................... 28
Underwriting Procedures Relating to the
Revolving Consumer Credit Lines............ 28
Revolving Consumer Credit Line Terms......... 29
Servicing of Revolving Consumer Credit
Lines...................................... 31
Revolving Consumer Credit Line Delinquency
Experience for the Portfolio................. 33
Revolving Consumer Credit Line Gross Charge-Off
Experience for the Portfolio................. 34
Revolving Consumer Credit Line Revenue
Experience for the Portfolio................. 34
The Revolving Consumer Credit Lines............ 35
The Series 1997-2 Participation................ 43
General...................................... 43
Conveyance and Performance of the Series
1997-2 Participation....................... 43
Maturity and Prepayment Considerations......... 44
Description of the Deposit Trust............... 48
General...................................... 49
Assignment of Receivables.................... 50
Representations and Warranties............... 51
Transfer of Seller's Interest; Additional
Sellers and Originators.................... 53
Additions of Credit Lines.................... 53
Removal of Deposit Trust Assets.............. 54
Discount Option.............................. 54
Amendments to Credit Line Agreements......... 54
Payments on Credit Lines; Deposits to
Collection Account......................... 55
Allocations and Collections.................. 55
Collection and Other Servicing Procedures.... 56
Servicing Compensation and Payment of
Expenses................................... 57
Evidence as to Compliance.................... 57
Certain Matters Regarding the Servicer and
the Seller................................. 57
Servicer Defaults............................ 58
Rights Upon a Servicer Default............... 59
</TABLE>
<TABLE>
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CAPTION PAGE
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<S> <C>
Amendment.................................... 59
Exercise of Rights by Holders of Series
Participation Interests.................... 60
The Deposit Trustee.......................... 60
Certain Activities........................... 60
Distributions on the Series 1997-2
Participation.............................. 61
Description of the Securities.................. 61
General...................................... 61
Distributions on the Securities.............. 62
Early Amortization Period.................... 67
Maturity..................................... 68
Reports to Noteholders....................... 68
Events of Default; Rights Upon Event of
Default.................................... 68
Certain Covenants............................ 70
Annual Compliance Statement.................. 70
Satisfaction and Discharge of Indenture...... 70
Modification of Indenture.................... 70
Certain Matters Regarding the Indenture
Trustee and the Issuer..................... 71
Duties of the Indenture Trustee.............. 71
Actions in Respect of Series 1997-2
Participation.............................. 72
Resignation of Indenture Trustee............. 72
Registration of Notes........................ 72
Administration Agreement..................... 75
Description of the Receivables Purchase
Agreement.................................... 75
Sale of Receivables.......................... 75
Representations and Warranties............... 76
Certain Covenants............................ 76
Amendments................................... 76
Sale of Credit Line Agreements............... 76
Termination.................................. 77
Certain Legal Aspects of the Receivables....... 77
Transfer of Receivables...................... 77
Certain Matters Relating to Insolvency....... 77
Consumer Protection Laws..................... 79
Potential Legislation........................ 79
"Due-on-Sale" Clauses........................ 80
Environmental Legislation.................... 80
Certain Federal and State Income Tax
Consequences................................. 81
General...................................... 81
Tax Characterization of The Deposit Trust and
The Issuer................................. 81
The Notes.................................... 82
State and Local Income and Franchise Tax
Consequences............................... 84
ERISA Considerations........................... 84
General...................................... 84
Prohibited Transactions and Fiduciary Duty... 84
Plan Asset Regulation........................ 85
Review by Plan Fiduciaries................... 86
Underwriting................................... 86
Legal Matters.................................. 86
Additional Information......................... 87
Index of Defined Terms......................... 88
Global Clearance, Settlement and Tax
Documentation Procedures..................... A-1
Initial Settlement........................... A-1
Secondary Market Trading..................... A-1
Certain U.S. Federal Income Tax Documentation
Requirements............................... A-3
</TABLE>
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus. Reference is made to the Index of Defined Terms for the location of
the definitions of certain capitalized terms.
ISSUER........................... The Household Consumer Loan Trust 1997-2
(the "Issuer"), a Delaware business trust
to be formed by the Seller and the Owner
Trustee pursuant to the Trust Agreement
(the "Trust Agreement").
SECURITIES ISSUED BY THE
ISSUER........................... The Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class B Notes and the
Certificates. The Notes will be issued
pursuant to the Indenture and will be
secured by the Trust Assets (as defined
below). Pursuant to the terms of the
Indenture, the Class B Notes will be
subordinate to the Class A Notes, the Class
A-3 Notes will be subordinate to the Class
A-2 and Class A-1 Notes and the Class A-2
Notes will be subordinate to the Class A-1
Notes. The Certificates will be issued by
the Issuer pursuant to the Trust Agreement.
The Certificates will be subordinate to the
Notes pursuant to the terms of the
Indenture.
The Notes represent obligations solely of
the Issuer and do not represent interests
in or obligations of the Seller, the
Servicer, the Deposit Trustee, the Owner
Trustee, the Indenture Trustee or any
affiliate thereof, except to the extent
described herein. None of the Notes, the
Series 1997-2 Participation or the Credit
Lines are insured or guaranteed by any
governmental agency or instrumentality.
Only the Class A Notes are offered hereby.
A. THE CLASS A-1 NOTES......... $912,000,000 Consumer Loan Asset Backed
Notes, Series 1997-2 (the "Class A-1
Notes").
THE CLASS A-2 NOTES......... $48,000,000 Consumer Loan Asset Backed
Notes, Series 1997-2 (the "Class A-2
Notes").
THE CLASS A-3 NOTES......... $90,000,000 Consumer Loan Asset Backed
Notes, Series 1997-2 (the "Class A-3
Notes").
Collectively, the Class A-1 Notes, Class
A-2 Notes and the Class A-3 Notes are
referred to herein as the "Class A Notes".
The Class A Notes will be issued pursuant
to the Indenture (the "Indenture") between
the Issuer and The Bank of New York, as
indenture trustee (the "Indenture
Trustee").
B. THE CLASS B NOTES........... $57,000,000 Consumer Loan Asset Backed
Notes, Series 1997-2 (the "Class B Notes").
The Class B Notes will be issued pursuant
to the Indenture and are not offered
hereby.
C. THE CERTIFICATES............ $42,000,000 Consumer Loan Asset Backed
Certificates, Series 1997-2 (the
"Certificates"). The Certificates will be
issued pursuant to the Trust Agreement and
are not offered hereby. The Certificates
will represent fractional undivided
beneficial interests in the Issuer.
4
<PAGE> 5
TRUST ASSETS..................... The "Trust Assets" include (i) a
participation interest (the "Series 1997-2
Participation") in (x) the Receivables
arising under the Credit Lines and the
proceeds thereof, and (y) the preferred
stock of the Seller held by the Deposit
Trustee (the "Preferred Stock") and (ii)
monies on deposit in certain accounts of
the Issuer for the benefit of
Securityholders. In addition to the Trust
Assets, as described herein, payments to
Noteholders will be supported by the
Overcollateralization Amount, the
subordination of certain classes of Notes
to other classes of Notes and by the
subordination of the Certificates to the
Notes. See "Description of the Deposit
Trust" herein for a description of the
Preferred Stock of the Seller held by the
Deposit Trust.
SELLER........................... Household Consumer Loan Corporation is a
corporation organized under the laws of the
State of Nevada and is a wholly-owned
special purpose subsidiary of Household
Finance Corporation ("HFC"). The Seller
purchases Receivables from the Subservicers
(as defined below). The Seller then sells
the Receivables and all rights with respect
thereto to the Deposit Trust. See
"Description of the Deposit Trust --
Assignment of Receivables" herein.
DEPOSIT TRUST.................... Household Consumer Loan Deposit Trust I
(the "Deposit Trust") is a common law
trust. Texas Commerce Bank National
Association acts as trustee for the Deposit
Trust. The Deposit Trust previously issued
participation interests in the pool of
Receivables in connection with the issuance
of other series of asset-backed securities.
It is expected that the Deposit Trust will
issue additional participation interests
from time to time (each participation
interest, a "Series Participation
Interest"). Each Series Participation
Interest will be issued in connection with
the issuance of a series of securities
(each, a "Series"). See "Annex II: Prior
Issuance of Series Participation Interests"
for a summary of the Series Participation
Interests previously issued by the Deposit
Trust. A participation interest was also
issued to the Seller (the "Seller's
Interest") which at any point in time
represents the entire undivided beneficial
interest in the Deposit Trust not
represented by the outstanding Series
Participation Interests.
The Series 1997-2 Participation will be the
only Series Participation Interest held by
the Issuer.
SERVICER......................... HFC, a subsidiary of Household
International, Inc., is the servicer of the
Credit Lines pursuant to the Pooling and
Servicing Agreement dated as of September
1, 1995 (the "Pooling and Servicing
Agreement") among the Seller, the Deposit
Trustee and the Servicer. Each Credit Line
is subserviced by the appropriate
Subservicer (as defined below) on behalf of
HFC as Servicer.
SUBSERVICERS..................... Household Realty Corporation, Household
Finance Corporation of California,
Household Finance Corporation II, Household
Finance Corporation III, Household Finance
Industrial Loan
5
<PAGE> 6
Company, Household Finance Realty
Corporation of New York, Household
Financial Center Inc., Household Finance
Corporation of Alabama, Household Finance
Corporation of Nevada, Household Finance
Realty Corporation of Nevada, Household
Industrial Loan Company of Kentucky,
Household Finance Industrial Loan Company
of Iowa, Household Finance Consumer
Discount Company, Household Industrial
Finance Company and Mortgage One
Corporation (collectively, the
"Subservicers" and each individually, a
"Subservicer"), are wholly-owned
subsidiaries of HFC, licensed to make and
service consumer loans in the states in
which the Credit Lines were originated. The
Subservicers originated the Credit Lines or
purchased them from third parties.
ADMINISTRATOR.................... HFC is the Administrator pursuant to an
Administration Agreement to be dated as of
November 1, 1997 (the "Administration
Agreement") among HFC, the Seller, the
Issuer and the Owner Trustee. Pursuant to
the Administration Agreement, HFC will
perform certain duties of the Issuer, the
Owner Trustee and the Seller under the
Indenture and the Trust Agreement. See
"Description of the
Securities -- Administration Agreement"
herein.
THE CREDIT LINES................. The Credit Lines which generate the
Receivables held by the Deposit Trust
consist of a portion of the total pool of
revolving consumer credit lines originated
or purchased by the Subservicers (and any
other consumer lending affiliates of HFC
that become Subservicers) from time to time
(the "Portfolio"). The Credit Lines are
designated to the Deposit Trust and are
required to satisfy the criteria set forth
in the Pooling and Servicing Agreement for
Eligible Credit Lines (as defined herein).
The Receivables arising under each Credit
Line, whether existing on the applicable
Cut-Off Date (as defined herein) for such
Receivables or thereafter generated have
been or will be sold by the Subservicers to
the Seller, which has sold or will sell
such Receivables to the Deposit Trust.
The Credit Lines are not being sold or
transferred to the Seller or to the Deposit
Trust and will continue to be held and
administered by the Subservicers. See "Risk
Factors -- Change in Loan Terms and Finance
Charges", "Description of the Deposit Trust
-- Assignment of Receivables", "Description
of the Receivables Purchase Agreement --
Sale of Receivables" herein.
The Seller entered into a receivables
purchase agreement dated as of September 1,
1995 (the "Initial Cut-Off Date"), with
certain of the Subservicers and as of
August 1, 1997 entered into an amendment to
such agreement pursuant to which an
additional wholly-owned subsidiary of HFC
may sell Receivables to the Seller (as
amended, the "Receivables Purchase
Agreement"). The Seller may enter into
further amendments or other similar
agreements with affiliates of HFC from time
to time. On September 28, 1995 (the
"Initial Issuance Date"), pursuant to the
Receivables Purchase Agreement,
Subservicers
6
<PAGE> 7
sold to the Seller all of their respective
rights, title and interest in the
Receivables existing under the Credit Lines
designated to the Deposit Trust as of the
Initial Cut-Off Date (the "Initial Credit
Lines", and such Receivables outstanding
under the Initial Credit Lines as of the
Initial Cut-Off Date, the "Initial
Receivables"). Each Subservicer has sold
and will continue to sell to the Seller all
of its right, title and interest in new
Principal Receivables and Finance Charge
and Administrative Receivables arising
under the Initial Credit Lines from time to
time.
Pursuant to the Pooling and Servicing
Agreement, all Receivables which arise
under the Credit Lines will be purchased by
the Seller from the Subservicers and will
be sold to the Deposit Trust. Subject to
certain limitations and conditions, the
Seller expects to continue to add
Receivables to the Deposit Trust from time
to time. To do so, the Seller may designate
additional Credit Lines, the Receivables of
which will be purchased from a Subservicer
and assigned by the Seller to the Deposit
Trust. Such additional Credit Lines may
include New Credit Lines and Additional
Credit Lines (each, as defined herein).
Since the Initial Cut-Off Date, the Seller
has conveyed to the Deposit Trust the
Receivables arising in certain Additional
Credit Lines in accordance with the
provisions of the Pooling and Servicing
Agreement. All Receivables arising under
Credit Lines designated to the Deposit
Trust, whether existing at the time such
Credit Lines are designated, or
subsequently generated, will be conveyed to
the Deposit Trust. The Seller will also
have the right, in certain circumstances,
to remove certain Credit Lines and the
Receivables arising thereunder from the
Deposit Trust, in which case, no further
interest in Receivables arising under such
Credit Lines will be transferred to the
Deposit Trust (the "Removed Credit Lines").
See "Description of the Deposit Trust --
Additions of Credit Lines" and "-- Removal
of Deposit Trust Assets".
THE RECEIVABLES.................. The Receivables include (a) all periodic
finance charges, and other amounts as
described in the Series 1997-2 Supplement
(as defined herein) (as increased by any
Principal Discount) (the "Finance Charge
Receivables"), (b) all administrative fees
and late charges and all other fees or
charges billed to obligors on the Credit
Lines (the "Administrative Receivables" and
together with the Finance Charge
Receivables, the "Finance Charge and
Administrative Receivables") and (c) all
amounts owed by obligors under the Credit
Line Agreements (as defined herein) and
other amounts in respect of principal as
described in the Series 1997-2 Supplement
(as decreased by any Principal Discount)
(the "Principal Receivables").
Recoveries (as defined below) attributed to
Defaulted Credit Lines (as defined below)
will be treated as collections of Finance
Charge Receivables. Finance Charge and
Administrative Receivables and Principal
Receivables will be allocated to the Series
1997-2 Participation in accordance with the
applicable
7
<PAGE> 8
Allocation Percentage (as defined herein)
for the related Collection Period. Finance
charges are assessed on Principal
Receivables and on certain of the Finance
Charge Receivables at rates determined by
the Subservicers with respect to the
respective Credit Lines generated by each
such party. As of the close of business on
September 30, 1997 (the "Series 1997-2
Cut-Off Date"), the interest rates on the
Receivables ranged from 0.00% to 36.00%
with a weighted average interest rate (by
principal balance) of 19.46%. As of the
Series 1997-2 Cut-Off Date, the average
principal balance of the Credit Lines
designated to the Deposit Trust was
$6,131.23.
Pursuant to the option to discount
receivables contained in the Pooling and
Servicing Agreement (see "Description of
the Deposit Trust -- Discount Option"), the
Seller has the option to designate or
redesignate a fixed percentage of each
Principal Receivable assigned to the
Deposit Trust as a finance charge
receivable (the "Principal Discount"). As
of the date of this Prospectus, the Seller
has not elected to exercise such option
with respect to the Receivables; however,
it may do so at any time in the future. In
the event of such election, such percentage
designated by the Seller is the "Discount
Percentage." The Discount Percentage may be
designated by the Seller at any time, and
once designated, may be increased,
decreased or withdrawn by the Seller. The
Principal Discount may apply to Principal
Receivables assigned to the Deposit Trust
prior to, on or after the date the Seller
makes such designation or redesignation.
When the Discount Option has been elected,
the Discount Percentage of Principal
Receivables will instead be treated as
Finance Charge and Administrative
Receivables, and the Discount Percentage of
all collections of Receivables that would
otherwise be Principal Receivables will be
applied as collections of Finance Charge
and Administrative Receivables. The
applicable Allocation Percentage of such
discounted amount treated as Finance Charge
and Administrative Receivables will be
available to make distributions of the
Participation Pass-Through Rate and
Defaulted Amounts allocated to the Series
1997-2 Participation. See "Risk Factors --
Discounted Principal Receivables" herein.
If such election is made, as described in
this Prospectus, all references herein to
Principal Receivables or Finance Charge
Receivables, or collections with respect
thereto, are deemed in the case of
Receivables assigned to the Deposit Trust
to refer to such Receivables, or
collections with respect thereto, as
defined above, after application of the
Principal Discount. In such event,
references in this Prospectus to Principal
Receivables or Finance Charge Receivables,
or collections with respect thereto, are
deemed in the case of Receivables assigned
to the Deposit Trust prior to such election
to refer to such Receivables, or
collections with respect thereto, without
application of a Discount Percentage. All
historical and current data herein
regarding credit lines and receivables is
presented without adjustment for a
Principal Discount.
8
<PAGE> 9
The amount of Receivables will fluctuate
from day to day as new Receivables are
generated and sold by the Subservicers to
the Seller and then by the Seller to the
Deposit Trust, and as existing Receivables
are collected, charged-off as uncollectible
or otherwise adjusted.
The amount represented by the Series 1997-2
Participation will not increase as a result
of additional Principal Receivables being
generated under any designated Credit Line
("Additional Balances"). Additional
Balances and Receivables attributable to
Aggregate Additional Credit Lines exceeding
the amount of reinvested collections for
the Series 1997-2 Participation and all
other Series Participation Interests will
be reflected in the principal balance of
the Seller's Interest. However, the
principal balance of the Series 1997-2
Participation will be adjusted to reflect
payments made on the Series 1997-2
Participation.
The aggregate amount of Receivables in the
Deposit Trust on the Series 1997-2 Cut-Off
Date was $4,278,341,258.64 of which
$4,127,807,129.41 were Principal
Receivables and $150,534,129.23 were
Finance Charge and Administrative
Receivables.
With respect to any date, the "Pool
Balance" will be equal to the aggregate of
the Principal Balances of all Credit Lines
as of such date. The "Principal Balance" of
a Credit Line on any day is equal to its
principal balance on the date the Credit
Line is designated to the Deposit Trust
(each such date, a "Cut-Off Date"), plus
(i) any Additional Balance in respect of
such Credit Line, minus (ii) all Principal
Collections credited against the Principal
Balance prior to such day, minus (iii) all
related Defaulted Amounts, and plus or
minus (iv) any correcting adjustments.
Notwithstanding the above, the Principal
Balance of Receivables for a Defaulted
Credit Line shall be zero. With respect to
any Distribution Date, a "Defaulted Credit
Line" is a defaulted Credit Line as to
which the Servicer has charged off all of
the related Principal Balance during the
related Collection Period. A "Defaulted
Amount" is the amount equal to the
Principal Balance of a Defaulted Credit
Line that the Servicer has charged off on
its servicing records in such Collection
Period.
SERIES 1997-2 PARTICIPATION...... Pursuant to the Series 1997-2 Supplement,
the Seller will convey the Series 1997-2
Participation to the Issuer. The Series
1997-2 Participation shall initially be
$1,200,000,000 (the "Initial Series 1997-2
Participation Invested Amount").
Thereafter, the "Series 1997-2
Participation Invested Amount" with respect
to any date will be an amount equal to the
Initial Series 1997-2 Participation
Invested Amount minus the sum of the Series
1997-2 Participation Principal Distribution
Amount (as defined herein) paid for all
Distribution Dates and the Defaulted
Amounts allocated to the Series 1997-2
Participation during the related and all
prior Collection Periods that have not been
included in the Series 1997-2 Participation
Principal
9
<PAGE> 10
Distribution Amount on the current or any
prior Distribution Date.
The Series 1997-2 Participation will be
entitled to receive a percentage of the
Interest Collections (which shall include
Recoveries), Principal Collections or Net
Principal Collections (as defined below)
and Defaulted Amounts received or incurred
during each Collection Period. With respect
to any Collection Period prior to the
occurrence of an Amortization Event,
Interest Collections and Defaulted Amounts
allocated to the Series 1997-2
Participation will be based upon the
Floating Allocation Percentage.
With respect to any Collection Period
during an Early Amortization Period,
Interest Collections will be allocated to
the Series 1997-2 Participation based upon
the Fixed Allocation Percentage. However,
Defaulted Amounts allocated to the Series
1997-2 Participation with respect to any
Collection Period after an Amortization
Event shall continue to be made based upon
the Floating Allocation Percentage.
Interest Collections with respect to any
Collection Period will be distributable to
the Issuer as holder of the Series 1997-2
Participation as described under
"Remittance on the Series 1997-2
Participation." Allocated Interest
Collections not so distributed will be
distributable to the Seller.
With respect to any Collection Period prior
to the Accelerated Amortization Date or the
commencement of an Early Amortization
Period, Principal Collections will be
allocated to the Series 1997-2
Participation based upon the greater of:
(i) the Floating Allocation Percentage of
Net Principal Collections (as defined
below) or (ii) the Minimum Principal
Amount. With respect to any Collection
Period after the Accelerated Amortization
Date or during the Early Amortization
Period, the Series 1997-2 Participation
will be entitled to Principal Collections
based upon the Fixed Allocation Percentage.
For any Distribution Date, the Fixed
Allocation Percentage applicable to
Principal Collections may be different than
the Fixed Allocation Percentage applicable
to Interest Collections if an Amortization
Event occurs after the Accelerated
Amortization Date.
"Net Principal Collections" will equal the
excess, if any, of Principal Collections
for the related Collection Period, minus
Additional Balances sold to the Deposit
Trust during any Collection Period. If
there is no excess, Net Principal
Collections will equal zero.
The Floating Allocation Percentage and the
Fixed Allocation Percentage are defined
herein under "Description of the Deposit
Trust -- Allocations and Collections". The
Minimum Principal Amount is defined herein
under "Description of the Deposit
Trust -- Distributions on the Series 1997-2
Participation".
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<PAGE> 11
COLLECTIONS...................... All collections on the Receivables will be
allocated by the Servicer as payments on
Credit Lines in accordance with the terms
of the Credit Line Agreements. See
"Description of the Deposit
Trust -- Allocations and Collections"
herein.
As to any Payment Date, "Interest
Collections" will be equal to the sum of
(i) the amounts collected during the
related Collection Period in respect of
Finance Charge and Administrative
Receivables, including Recoveries and (ii)
the interest portion of the Transfer Price
(as defined herein) received in the event
the Series 1997-2 Participation is
reassigned to the Seller, reduced, if HFC
is no longer the Servicer, by the Servicing
Fee for such Collection Period.
As to any Payment Date, "Principal
Collections" will be equal to the sum of
(i) the amounts collected during the
related Collection Period in respect of
Principal Receivables (other than the
principal portion of any Recoveries), and
(ii) the principal portion of the price
received for any repurchased Receivable and
the Transfer Price.
As to any Payment Date, the "Collection
Period" is the calendar month preceding the
month of such Payment Date.
On the Business Day prior to each Payment
Date, the Servicer will deposit the
remittances to be made on the Series 1997-2
Participation for such Payment Date into an
account (the "Collection Account")
established and maintained by the Deposit
Trustee under the Pooling and Servicing
Agreement.
ACCELERATED AMORTIZATION DATE.... The "Accelerated Amortization Date" is
October 31, 2002.
EARLY AMORTIZATION PERIOD........ An Early Amortization Period will begin
with the first day of the Collection Period
in which an Amortization Event has occurred
and will continue until the unpaid
principal balance of the Series 1997-2
Participation is zero. "Amortization
Events" will include, but are not limited
to:
(a) failure of the Seller to observe
certain covenants;
(b) certain breaches of representations and
warranties;
(c) the occurrence of certain events of
bankruptcy, insolvency or receivership
related to the Seller or the Servicer;
(d) the Deposit Trust or the Issuer becomes
an investment company under the
Investment Company Act of 1940;
(e) a Servicer Default occurs under the
Pooling and Servicing Agreement;
(f) the percentage (averaged over any three
consecutive months) obtained by
dividing i) the Overcollateralization
Amount by ii) the outstanding unpaid
principal balance of the Series 1997-2
Participation, is reduced below 4.25%;
and
(g) the portion of the Seller's Trust
Amount owned by Household Consumer Loan
Corporation is reduced below 1.01% of
the aggregate invested amounts or
certificate principal
11
<PAGE> 12
balances, as specified in each Series
Supplement to the Pooling and Servicing
Agreement for all outstanding Series
Participation Interests.
See "Description of the Securities -- Early
Amortization Period."
REMITTANCE ON THE SERIES 1997-2
PARTICIPATION.................. On each Distribution Date the Deposit Trust
will make the following remittances to the
Indenture Trustee in respect of collections
during the preceding Collection Period:
INTEREST.................... An amount will be remitted to the Indenture
Trustee on behalf of the Issuer from the
applicable Allocation Percentage of
Interest Collections for the preceding
Collection Period equal to the amount
accrued at the Participation Pass-Through
Rate on the unpaid principal balance of the
Series 1997-2 Participation. The
"Participation Pass-Through Rate" for each
Distribution Date is a per annum rate equal
to Prime Rate (as defined herein), less
1.50%, subject to a minimum rate equal to a
per annum rate which will result in an
amount sufficient to pay the full amount of
interest due on the Notes and to make a
full distribution on the Certificates at
the Certificate Rate, plus one-twelfth of
the Series 1997-2 Participation Invested
Amount, multiplied for each Distribution
Date occurring prior to December 1998, by
1.50%, and for each Distribution Date
occurring in December 1998 or thereafter,
by 0.25% (the "Series 1997-2 Participation
Interest Distribution Amount").
PRINCIPAL................... An amount will be remitted to the Indenture
Trustee on behalf of the Issuer equal to
the sum of the applicable Allocation
Percentage of Principal Collections, or
during any Collection Period prior to the
Accelerated Amortization Date or
commencement of an Early Amortization
Period, equal to the sum of (a) the greater
of: (i) the Floating Allocation Percentage
of Net Principal Collections or (ii) the
Minimum Principal Amount, as defined
herein, and (b) to the extent of the
applicable Allocation Percentage of
Interest Collections remaining after
providing for the distribution of the
Participation Pass-Through Rate on the
Series 1997-2 Participation, Defaulted
Amounts and the amount of any Defaulted
Amounts previously allocated to the Series
1997-2 Participation that have not been
included in the Series 1997-2 Principal
Distribution Amount on any prior
Distribution Date (the "Series 1997-2
Participation Principal Distribution
Amount").
SECURITIES INTEREST.............. Interest on each class of Notes will be
payable monthly on the fifteenth day of
each month or, if such day is not a
Business Day (as defined herein), on the
next succeeding Business Day (each, a
"Payment Date"), commencing in December
1997, in an amount equal to interest
accrued during the related Interest Period
(as defined below) at the applicable Note
Rate on the Security Balance for the
related class of Notes. The applicable
"Note Rate" for an Interest Period will be
the per annum rate equal to the sum of (a)
the London interbank offered rate for
one-month United States dollar deposits
("LIBOR"),
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<PAGE> 13
determined as specified herein, as of the
second LIBOR Business Day (as defined
herein) prior to the first day of such
Interest Period (or as of two LIBOR
Business Days prior to the Closing Date, in
the case of the first Interest Period) and
(b) 0.18% per annum with respect to the
Class A-1 Notes, 0.29% per annum with
respect to the Class A-2 Notes, 0.40% per
annum with respect to the Class A-3 Notes
and a rate specified in the Indenture not
to exceed 0.875% per annum in respect of
the Class B Notes. The Note Rate for each
class is subject to a maximum rate as
described under "Description of the
Securities -- Distributions on the
Securities" herein. Interest on the Notes
in respect of any Payment Date will accrue
from (and including) the preceding Payment
Date (or in the case of the first Payment
Date, from the date of the initial issuance
of the Notes (the "Closing Date")) through
(and including) the day preceding such
Payment Date (each such period, an
"Interest Period") on the basis of a
360-day year and the actual number of days
in such Interest Period. See "Description
of the Securities -- Distributions on the
Securities". Interest for any Payment Date
due but not paid on such Payment Date shall
bear interest, to the extent permitted by
applicable law, at the related Note Rate
until paid. Failure to pay interest in full
on any Payment Date after expiration of the
applicable grace period is an Event of
Default under the Indenture.
Distributions on Certificates will be
payable monthly on each Payment Date,
commencing in December 1997, at the
Certificate Rate on the Security Balance of
the Certificates for the related Interest
Period. The "Certificate Rate" will
generally equal the sum of (a) LIBOR
(calculated in the manner described above
for the Class A and Class B Notes for such
Interest Period) and (b) the rate specified
in the Trust Agreement not to exceed 1.25%
per annum, subject to certain limitations
as described herein under "Description of
the Securities -- Distributions on the
Securities." The Certificate Rate will
accrue on any amounts distributable in
payment of the Certificate Rate, but not
paid on any monthly Payment Date.
SECURITIES PRINCIPAL............. On each Payment Date, to the extent funds
are available therefor, other than the
Payment Date in November 2007 (the "Final
Payment Date"), principal payments will be
due and payable on the Notes and
distributions will be due on the
Certificates in respective amounts
described below under "Allocation of
Remittances on the Series 1997-2
Participation".
On the Final Payment Date, principal will
be due and payable on the Notes in an
amount equal to the Security Balance
thereof on such Payment Date.
In addition, on any Payment Date, to the
extent of funds available therefor,
Noteholders will also be entitled to
receive principal payments in respect of
the Accelerated Principal Payment Amount as
described in this Prospectus Summary under
"Allocation of Remittances on the Series
1997-2 Participation".
13
<PAGE> 14
In no event will principal payments on the
Notes on any Payment Date exceed the
Security Balance thereof on such date.
ALLOCATION OF REMITTANCES ON THE
SERIES 1997-2 PARTICIPATION...... The majority of the defined terms used in
this Allocation of Remittances on the
Series 1997-2 Participation are defined
beginning on page 64 under "Description of
the Securities -- Distributions on the
Securities -- Allocations of Remittances on
the Series 1997-2 Participation".
Except as provided below, on each Payment
Date other than a Payment Date occurring
after an Event of Default, remittances on
the Series 1997-2 Participation will be
allocated in the following order of
priority:
(i) sequentially, as payment for the
amount of interest due on the Class A-1
Notes, Class A-2 Notes, Class A-3 Notes
and Class B Notes;
(ii) except as otherwise specified
below, to the Certificates on behalf of
the Issuer, as payment of the amount
distributable in respect of the
Certificate Rate on the Security
Balance of the Certificates and
previously unpaid;
(iii) sequentially, up to the Optimum
Monthly Principal:
(a) to the Class A-1 Notes until
the Security Balance of the Class
A-1 Notes equals the Class A-1
Targeted Principal Balance,
(b) to the Class A-2 Notes until
the Security Balance of the Class
A-2 Notes equals the Class A-2
Targeted Principal Balance, to the
extent the Adjusted Security Balance
of the Class A-2 Notes is not
reduced below the Minimum Security
Balance for the Class A-2 Notes,
(c) to the Class A-3 Notes until
the Security Balance of the Class
A-3 Notes equals the Class A-3
Targeted Principal Balance, to the
extent the Adjusted Security Balance
of the Class A-3 Notes is not
reduced below the Minimum Security
Balance for the Class A-3 Notes, and
(d) to the Class B Notes until
the Security Balance of the Class B
Notes equals the Class B Targeted
Principal Balance, to the extent the
Adjusted Security Balance of the
Class B Notes is not reduced below
the Minimum Security Balance for the
Class B Notes;
(iv) to the Certificates, up to the
remaining Optimum Monthly Principal
until the Security Balance of the
Certificates equals the Certificate
Targeted Balance, to the extent the
Adjusted Security Balance of the
Certificates is not reduced below
$14,000,000;
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<PAGE> 15
(v) to the Seller, in reduction of the
Overcollateralization Amount, up to the
remaining Optimum Monthly Principal
provided the Overcollateralization
Amount is not less than $17,000,000;
(vi) as principal on the Notes,
sequentially, up to the Accelerated
Principal Payment Amount for such
Payment Date:
(a) to the Class A-1 Notes until
the Security Balance of the Class
A-1 Notes equals the Class A-1
Targeted Principal Balance,
(b) to the Class A-2 Notes until
the Security Balance of the Class
A-2 Notes equals the Class A-2
Targeted Principal Balance, to the
extent the Adjusted Security Balance
of the Class A-2 Notes is not
reduced below the Minimum Security
Balance for the Class A-2 Notes,
(c) to the Class A-3 Notes until
the Security Balance of the Class
A-3 Notes equals the Class A-3
Targeted Principal Balance, to the
extent the Adjusted Security Balance
of the Class A-3 Notes is not
reduced below the Minimum Security
Balance for the Class A-3 Notes,
(d) to the Class B Notes until
the Security Balance of the Class B
Notes equals the Class B Targeted
Principal Balance, to the extent the
Adjusted Security Balance of the
Class B Notes is not reduced below
the Minimum Security Balance for the
Class B Notes,
(e) to the Class A-1 Notes until
the Security Balance of the Class
A-1 Notes equals zero,
(f) to the Class A-2 Notes until
the Security Balance of the Class
A-2 Notes equals zero,
(g) to the Class A-3 Notes until
the Security Balance of the Class
A-3 Notes equals zero, and
(h) to the Class B Notes until
the Security Balance of the Class B
Notes equals zero;
(vii) as principal on the Notes,
sequentially, up to the remaining
Optimum Monthly Principal for such
Payment Date:
(a) to the Class A-1 Notes until
the Security Balance of the Class
A-1 Notes equals zero,
(b) to the Class A-2 Notes until
the Security Balance of the Class
A-2 Notes equals zero,
(c) to the Class A-3 Notes until
the Security Balance of the Class
A-3 Notes equals zero, and
15
<PAGE> 16
(d) to the Class B Notes until
the Security Balance of the Class B
Notes equals zero;
(viii) to the Certificates, up to the
remaining Optimum Monthly Principal
until the Security Balance of the
Certificates equals the Certificate
Minimum Balance, or if the Series
1997-2 Participation Invested Amount is
zero, then to the Certificates until
the Security Balance of the
Certificates equals zero;
(ix) to the Seller in reduction of the
Overcollateralization Amount to an
amount not less than zero, the
remaining Optimum Monthly Principal;
and
(x) any remaining amounts to the
Seller.
In the event (a) immediately prior to a
Distribution Date the Series 1997-2
Participation Invested Amount is less than
the aggregate Security Balance of the Class
A and Class B Notes immediately prior to
the related Payment Date, or (b) the
remittances on the Series 1997-2
Participation for a Payment Date is less
than the aggregate amount to be paid
pursuant to clauses (i) and (ii) above, the
amount to be paid pursuant to clause (ii)
above will be paid only after payments are
made on the Notes pursuant to clause (iii).
OVERCOLLATERALIZATION AMOUNT..... As of the Closing Date, the
Overcollateralization Amount is equal to
$51,000,000 (the "Initial
Overcollateralization Amount") or 4.25%
(the "Initial Overcollateralization
Percentage") of the Initial Series 1997-2
Participation Invested Amount. For each
Payment Date, the "Overcollateralization
Amount" equals the amount by which the
Series 1997-2 Participation Invested Amount
exceeds the aggregate Security Balance of
the Series 1997-2 Securities, in each case
after giving effect to distributions on
such Payment Date. For each Payment Date,
the "Accelerated Principal Payment Amount"
is equal to the lesser of (i) the amount by
which the remittance on the Series 1997-2
Participation exceeds the sum of (a) the
amount to be distributed on the Notes with
respect to interest and the Certificates
with respect to the Certificate Rate on
such Payment Date and (b) the Optimum
Monthly Principal for such Payment Date and
(ii) one-twelfth of the Series 1997-2
Participation Invested Amount, multiplied
for each Payment Date occurring prior to
December 1998, by 1.50%, and for each
Payment Date occurring in December 1998 or
thereafter, by 0.25%. The distribution of
Accelerated Principal Payment Amounts, if
any, to Noteholders will increase the
Overcollateralization Amount. The
Overcollateralization Amount will be
available to absorb any Defaulted Amounts
that are allocated to Noteholders and not
covered by distributions on the Series
1997-2 Securities. See "Description of the
Securities -- Distributions on the
Securities -- Overcollateralization Amount"
herein.
ISSUANCE OF ADDITIONAL SERIES.... Five Series were previously issued through
the sale of Series Participation Interests
in the Receivables of the Deposit Trust.
16
<PAGE> 17
See "Annex II: Prior Issuance of Series
Participation Interests" for a summary of
the Series Participation Interests
previously issued by the Deposit Trust.
Additional Series are expected to be issued
from time to time through the sale of
additional Series Participation Interests
to new issuers. It is anticipated that the
securities of other Series will have
expected final payment dates, rapid
amortization dates, amortization periods,
non-amortization periods, accelerated
amortization periods and periods during
which the principal amount of such
securities is accumulated in a principal
funding account or paid to holders of such
securities which differ from those for the
Series 1997-2 Securities.
Accordingly, each Series may have entirely
different methods for calculating the
amount and timing of principal and interest
distributions to securityholders and Series
Enhancements (as defined below) and may
utilize other methods for determining the
portion of collections allocable to such
securityholders and Series Enhancements.
See "Deposit Trust Risk Factors."
"Series Enhancement" means any letter of
credit, surety bond, subordinated interest
in the trust assets, collateral invested
amount, collateral account, spread account,
guaranteed rate agreement, maturity
liquidity facility, tax protection
agreement, interest rate swap agreement,
interest rate cap agreement or other
similar arrangement for the benefit of
holders of interests in a Series.
DENOMINATIONS.................... The Notes will be issued in the aggregate
principal amounts set forth on the cover
page hereof, in fully registered
denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
REGISTRATION OF NOTES............ The Notes will initially be issued in
book-entry form. Persons acquiring
beneficial ownership interests in the Notes
("Note Owners") may elect to hold their
Notes through DTC, in the United States, or
Cedel Bank, societe anonyme ("Cedel") or
the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in
accordance with the usual rules and
operating procedures of the relevant
system.
Cross-market transfers between persons
holding directly or indirectly through DTC,
on the one hand, and counterparties holding
directly or indirectly through Cedel or
Euroclear, on the other, will be effected
in DTC through Citibank, N.A. or The Chase
Manhattan Bank, the relevant depositaries
(collectively, the "Depositaries") of Cedel
or Euroclear, respectively, and each a
participating member of DTC. So long as the
Notes are in book-entry form, such Notes
will be evidenced by one or more Notes
registered in the name of CEDE & Co., the
nominee of DTC. The interests of the Note
Owners will be represented by book-entries
on the records of DTC and participating
members thereof. Notes will be available in
definitive form only under the limited
circumstances described herein. All
references in this Prospectus
17
<PAGE> 18
to "Holders" or "Noteholders" shall be
deemed, unless the context clearly requires
otherwise, to refer to CEDE & Co., as
nominee of DTC. See "Risk Factors" and
"Description of the Securities --
Registration of Notes" herein.
RECORD DATE...................... The last day preceding a Payment Date, or
if the Notes are no longer book-entry
securities, the last day of a month
preceding a Payment Date.
SERVICING........................ The Servicer will be responsible for
servicing and managing the Credit Lines and
making collections on the Receivables. Each
Credit Line will be subserviced by the
appropriate Subservicer on behalf of HFC,
as Servicer. The Servicer will cause
Interest Collections and Principal
Collections to be deposited into the
Collection Account, except as described
herein. On the fifth Business Day prior to
any Payment Date (the "Determination
Date"), the Servicer will calculate, and
instruct the Deposit Trust, the Issuer and
the Indenture Trustee regarding the amounts
to be paid to the Noteholders with respect
to the related Collection Period. See
"Description of the Securities --
Distributions on the Securities."
As long as HFC is the Servicer it will
receive, or be entitled to retain on behalf
of itself and the Subservicers, a portion
of the Interest Collections remaining after
distribution of the Series 1997-2
Participation Interest Distribution Amount
and the Series 1997-2 Participation
Principal Distribution Amount a monthly
servicing fee (the "Servicing Fee")
attributable to the Series 1997-2
Participation in the amount of 2.00% per
annum of the Series 1997-2 Participation
Invested Amount as of the end of the
related Collection Period. See "Description
of the Deposit Trust -- Servicing
Compensation and Payment of Expenses." In
certain limited circumstances, the Servicer
may resign or be removed under the Pooling
and Servicing Agreement, in which event
either the Deposit Trustee or, so long as
it meets certain eligibility standards as
set forth in the Pooling and Servicing
Agreement, a third-party servicer will be
appointed as a successor Servicer. In such
event, the Servicing Fee will be paid to
the successor Servicer from Interest
Collections prior to any distributions on
the Series 1997-2 Participation. See
"Description of the Deposit Trust --
Certain Matters Regarding the Servicer and
the Seller."
If the Servicer fails to comply with
certain representations, warranties or
covenants with respect to any Credit Line
and such noncompliance is not cured within
a specified period and has a material
adverse effect on the Noteholders, or if
certain events of insolvency occur with
respect to the Servicer, the Deposit
Trustee may appoint a successor Servicer.
See "Description of the Deposit Trust --
Assignment of Receivables."
FINAL PAYMENT OF PRINCIPAL;
TERMINATION...................... The Notes will mature on the earlier of the
date the Notes are paid in full or on the
Payment Date occurring in November 2007. In
addition, the Issuer of the Notes will pay
the Notes in
18
<PAGE> 19
full upon the exercise by the Seller of its
option to purchase the Series 1997-2
Participation after the aggregate Security
Balance of the Series 1997-2 Securities is
reduced to an amount less than or equal to
$114,900,000 (10% of the initial aggregate
Security Balance of the Series 1997-2
Securities). See "Description of the
Securities -- Maturity."
MANDATORY RETRANSFER OF CERTAIN
RECEIVABLES.................... The Seller will make certain
representations and warranties with respect
to the Trust Assets, the Credit Lines and
the Receivables. If the Seller breaches
certain of its representations and
warranties with respect to any Receivable,
then depending upon the representation or
warranty breached, if such breach has a
material adverse effect on the interest of
the Noteholders and the persons holding the
Certificates ("Certificateholders") and is
not cured within the specified period, such
Receivable will be removed from the Deposit
Trust and assigned to the Seller for
reassignment to the related Subservicer.
TAX STATUS....................... Special tax counsel to the Seller is of the
opinion that under existing law, the Class
A Notes will be characterized as
indebtedness, and neither the Deposit Trust
nor the Issuer will be characterized as an
association (or publicly traded
partnership) taxable as a corporation. The
Seller, the Indenture Trustee, the Owner
Trustee and the Class A Noteholders will
agree to treat the Class A Notes as
indebtedness for all federal, state and
local income and franchise tax purposes.
See "Certain Federal and State Income Tax
Consequences" for additional information
concerning the application of federal
income tax laws.
ERISA CONSIDERATIONS............. Generally a pension or an employee benefit
plan (a "Plan") subject to the requirements
of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and the
Internal Revenue Code of 1986, as amended
(the "Code") is permitted to purchase
instruments like the Notes that are debt
under applicable state law and have no
"substantial equity features" without
reference to the prohibited transaction
requirements of ERISA and the Code, absent
certain circumstances described in "ERISA
Considerations" herein.
In the opinion of ERISA Counsel (as defined
herein), the Class A Notes will be
classified as indebtedness without
substantial equity features for ERISA
purposes. However, if the Class A Notes are
deemed to be equity interests and no
statutory, regulatory or administrative
exemption applies, the Issuer will hold
plan assets by reason of a Plan's
investment in the Class A Notes. Any Plan
fiduciary considering whether to purchase
any Class A Notes on behalf of a Plan
should consult with its counsel regarding
the applicability of the provisions of
ERISA and the Code. See "ERISA
Considerations" herein.
RISK FACTORS..................... Certain risks related to the Notes, the
Credit Lines, the Receivables, the Deposit
Trust and the Issuer are set forth in "Risk
Factors" and "Deposit Trust Risk Factors"
herein.
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<PAGE> 20
Among the factors described in such
sections are considerations related to: the
book-entry registration of the Notes, the
amortization rate of outstanding
Receivables, the maturity of the Credit
Lines, the servicing and administration of
the Credit Lines, the insolvency of the
Seller and Servicer, the dilution in voting
power upon issuance of additional Series
Participation Interests in the Deposit
Trust, and the effect of adding additional
receivables to the Deposit Trust.
LISTING.......................... Application will be made to list the Class
A Notes on the Luxembourg Stock Exchange.
RATING........................... It is a condition to the issuance of the
Class A Notes that they be rated in at
least the rating category specified below
(or its equivalent) by at least two
nationally recognized statistical rating
organizations:
<TABLE>
<S> <C>
Class A-1......................... "AAA"
Class A-2......................... "AA"
Class A-3......................... "A"
</TABLE>
The ratings of the Class A Notes are based
primarily on the value of the Receivables,
the credit quality of HFC and the terms of
the Class A Notes. There is no assurance
that the ratings will remain in place for
any given period of time or that the
ratings will not be lowered or withdrawn by
the Rating Agencies.
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<PAGE> 21
RISK FACTORS
LIMITED LIQUIDITY. Application will be made to list the Class A Notes on
the Luxembourg Stock Exchange. There is currently no market for the Class A
Notes and while the Underwriters currently intend to make a market in the Class
A Notes, they are under no obligation to do so. There can be no assurance that a
secondary market will develop or, if a secondary market does develop, that it
will provide holders of the Class A Notes with liquidity of investment or that
it will continue while the Class A Notes remain outstanding.
Issuance of the Notes in book-entry form may reduce the liquidity of such
Notes in the secondary trading market since investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates. See
"Description of the Securities -- Registration of Notes" herein.
DIFFICULTY IN PLEDGING. Since transactions in the Notes can be effected
only through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Note Owner to pledge a Note to
persons or entities that do not participate in the DTC, Cedel or Euroclear
system, or otherwise to take actions in respect of such Notes, may be limited
due to lack of a physical certificate representing the Notes. See "Description
of the Securities -- Registration of Notes" herein.
POTENTIAL DELAYS IN RECEIPT OF DISTRIBUTIONS. Note Owners may experience
some delay in their receipt of distributions of interest and principal on the
Notes since such distributions will be forwarded by the Indenture Trustee to DTC
and DTC will credit such distributions to the accounts of its Participants (as
defined herein) which will thereafter credit them to the accounts of Note Owners
either directly or indirectly through indirect participants. Such delays will
decrease the yield to the Note Owners from the Notes. See "Description of the
Securities -- Registration of Notes" herein.
NATURE OF UNDERLYING ASSETS. Payment of the Minimum Monthly Payment with
respect to the Principal Balance of a Personal Unsecured Credit Line (as defined
herein) is not expected to fully amortize such Principal Balance during the life
of the borrower. The Principal Balances of Personal Unsecured Credit Lines may
be declared due and payable upon the death of any borrower with respect to such
Credit Lines; however, the Subservicers may continue to accept payments made on
such Credit Lines. With respect to Personal Homeowner Credit Lines (as defined
herein), the Minimum Monthly Payment is not, in most instances, expected to be
sufficient to fully amortize the Principal Balance of a Personal Homeowner
Credit Line prior to maturity. As a result, a borrower under a Personal
Homeowner Credit Line will generally be required to make a balloon payment to
repay the principal amount of the Credit Line at its maturity. The ability to
make such a payment may be dependent on the ability of a borrower to refinance
the balance due on the Credit Line. An increase in interest rates over the Loan
Rate applicable at the time the Credit Line was originated may have an adverse
effect on the borrower's ability to pay the required Minimum Monthly Payment. In
addition, such an increase in interest rates may reduce the borrower's ability
to refinance and to pay the balance of a Personal Homeowner Credit Line at its
maturity. A borrower's payment in any month may be as low as the interest
payment for such month or as high as the entire outstanding principal balance
(plus accrued interest, any insurance premium and any outstanding Administrative
Receivables).
CASH FLOW CONSIDERATIONS. Collections on the Credit Lines may vary because,
among other things, borrowers may make payments during any month (other than the
month in which the Credit Line matures) as low as the Minimum Monthly Payment
for such month or as high as the outstanding balance plus accrued interest
thereon. Collections on the Credit Lines may also vary due to seasonal
purchasing and payment habits of borrowers.
Minimum Monthly Payments will generally at least equal and may exceed
accrued interest. However, such payments will not result in a significant
reduction in the principal balance of the Credit Lines. Although historically,
most borrowers pay down all or part of their outstanding principal balances
prior to maturity, borrowers are under no obligation to do so and, in the event
such balances have not been substantially paid down prior to maturity, some
borrowers may find themselves unable to make the required final payment.
Most of the Credit Lines will not mature prior to the maturity date of the
Notes. It has been HFC's experience and is expected to continue to be the case
that borrowers will prepay the Receivables at a sufficient rate to retire the
Notes prior to their maturity date, but no assurance can be given in this
respect.
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<PAGE> 22
PREPAYMENT CONSIDERATIONS. All of the Credit Lines may be prepaid in whole
or in part at any time. Neither the Seller nor HFC is aware of any publicly
generated studies or statistics available on the rate of prepayment of such
consumer loans. Generally, consumer loans are not viewed by borrowers as
permanent financing. Accordingly, the Credit Lines can be expected to prepay
prior to their maturities. On the other hand, because the Credit Lines are not
fully amortizing, in the absence of voluntary borrower prepayments, the Credit
Lines could experience much slower rates of principal payment than fully
amortizing loans. Actual prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates and the
availability of alternative financing (including from HFC or any of its
affiliates). As described under "-- Changes in Loan Terms and Finance Charges"
below, HFC and the Subservicers implemented a rate increase in 1997 with respect
to certain of the Personal Unsecured Credit Lines. Additional rate increases
with respect to some or all of the Credit Lines may also be made in the future.
Such increases may result in a greater rate of prepayment and delinquency with
respect to the affected Credit Lines. However, as the ability of a borrower to
pay depends upon a number of factors, HFC and the Subservicers cannot predict
the change in prepayments and delinquencies that may result due to a rate
change. It is expected that the aggregate yield on the Credit Lines will
increase as a result of such rate changes. The amount by which the aggregate
yield may increase cannot be predicted.
NOTE RATING. The ratings of the Notes will depend primarily on an
assessment by the Rating Agencies of the underlying Credit Lines, the continued
ability of the Subservicers to originate and assign the Receivables to the
Seller, and the protection afforded to Noteholders by the subordination of
certain classes of the Notes, the Certificates and the Overcollateralization
Amount. The ratings assigned by the Rating Agencies are not recommendations to
purchase, hold or sell the Notes, as such ratings do not consider the market
price or suitability for a particular investor. There is no assurance that the
ratings will remain in place for any given period of time or that the ratings
will not be lowered or withdrawn if in the judgment of the Rating Agencies
future circumstances so warrant, including a change in the credit ratings of
HFC, or the ability of the Subservicers to originate and assign additional
Receivables to the Seller.
CHANGES IN LOAN TERMS AND FINANCE CHARGES. Pursuant to the Receivables
Purchase Agreement, the related Subservicer transfers Receivables and not the
related Credit Lines to the Seller. Consequently, pursuant to the Pooling and
Servicing Agreement, the Seller will not be transferring the Credit Lines to the
Deposit Trust but only the Receivables arising under the Credit Lines. As
holders of the Credit Lines, the Subservicers will have the right to determine
the annual percentage rates and the fees which will be applicable from time to
time to the Credit Lines, to alter the Minimum Monthly Payment required under
the Credit Lines and to change various other terms with respect to the Credit
Lines.
There can be no assurances that changes in applicable law, changes in the
marketplace or prudent business practice might not result in a determination by
the Subservicers to change customer finance charges or take other actions which
would change the terms of the Credit Lines. HFC and the Subservicers implemented
a rate increase during 1997 with respect to certain of the Personal Unsecured
Credit Lines. Additional rate increases with respect to some or all of the
Credit Lines may also be made in the future. Such increases will be imposed only
where state law permits and may be made with respect to some or all of the
Credit Lines originated in a state. Any rate change will be implemented by
increasing the Margin (for Variable Rate Credit Lines) and the Loan Rate (for
Fixed Rate Credit Lines). The actual amount of the increase with respect to
particular Credit Lines may be limited by state law, the applicable Credit Line
Agreement or due to competitive considerations.
DISCOUNTED PRINCIPAL RECEIVABLES. Under the Pooling and Servicing
Agreement, the Seller has the right at any time to designate or redesignate a
fixed percentage (the "Discount Percentage") of the amount of Principal
Receivables assigned to the Deposit Trust that would otherwise be treated as
Principal Receivables to be treated as Finance Charge and Administrative
Receivables. Subject to the satisfaction of certain conditions, such designation
may be increased, decreased or withdrawn with respect to such Receivables. Any
applicable designation will increase the percentage of collections on the
Receivables that are allocated to Finance Charge and Administrative Collections.
Any such designation should also decrease the likelihood of the occurrence of an
Amortization Event. However, a designation will also reduce the aggregate amount
of receivables available to the
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<PAGE> 23
Seller to sell to the Deposit Trust, which may increase the likelihood that the
Seller will not be able to add Principal Receivables to the Deposit Trust.
SALE OF ASSETS; INSOLVENCY CONSIDERATIONS. The Subservicers each warrant in
the Receivables Purchase Agreement that the transfers of all Receivables to the
Seller are valid sales and assignments of such Receivables. The Subservicers
have filed, and will file appropriate Uniform Commercial Code ("UCC") financing
statements to evidence such sales and perfect the Seller's right, title and
interest to and in such Receivables. The Seller warrants in the Pooling and
Servicing Agreement that its transfers of the Receivables to the Deposit Trust
are either valid sales and assignments or the grant to the Deposit Trust of a
security interest in all such Receivables. The Seller has warranted that if the
transfers to the Deposit Trust are deemed to be a grant of a security interest
in the Receivables, the Deposit Trust will have a first priority perfected
security interest therein. The Deposit Trust warrants that the Issuer will
either be the owner of or have a first priority perfected security interest in
the Series 1997-2 Participation. The Issuer will pledge all its rights in the
Series 1997-2 Participation to the Indenture Trustee on behalf of the
Noteholders.
Each of the Subservicers and the Seller believes that the transfers of the
Receivables pursuant to the Receivables Purchase Agreement are true sales of the
Receivables. The Seller believes that each transfer of Receivables pursuant to
the Pooling and Servicing Agreement is either a true sale or a grant to the
Deposit Trust of a security interest in all such Receivables. However, in the
event of an insolvency of a Subservicer and/or the Seller, it is possible that a
receiver, conservator or trustee in bankruptcy could, under the federal
bankruptcy laws, challenge the Seller's and/or the Deposit Trust's right to the
Receivables and the Issuer's beneficial interest in the Receivables. In such
event, delays in payments on the Notes and reductions in the amount of those
payments could occur. See "Certain Legal Aspects of the Receivables -- Certain
Matters Relating to Insolvency".
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and if no Servicer Default other than such bankruptcy or
insolvency-related Servicer Default exists, the bankruptcy trustee or receiver
may have the power to prevent the Deposit Trustee from appointing a successor
Servicer. If a conservator, receiver or trustee in bankruptcy were appointed for
a Subservicer, or if certain other events occur relating to the bankruptcy,
receivership or insolvency of the Seller (such events with respect to the
Seller, an "Insolvency Event"), new Receivables would not be transferred by the
Seller to the Deposit Trust. In the event of an Insolvency Event with respect to
the Seller, the Deposit Trustee would cause a liquidation of the Receivables
held by the Deposit Trust (unless holders of Series Participation Interests
aggregating more than 50% of the aggregate unpaid principal amount of all Series
Participation Interests instruct otherwise and provided that a receiver,
conservator or trustee in bankruptcy for the Seller does not order a sale
despite such instructions not to sell), which would cause an early retirement of
the Notes. The entire proceeds of such sale or liquidation of Receivables will
be treated as collections of Receivables and allocated accordingly among the
Series Participation Interests. The Receivables may have limited liquidity and
there can be no assurance that any can be sold for an amount which equals or
exceeds the outstanding principal amount thereof. In the case of the Notes, such
proceeds allocable to the Noteholders will be applied as described in
"Description of the Securities -- Distributions on the Securities". See
"Description of the Securities -- Early Amortization Period" for a discussion of
other events which might lead to the commencement of an Early Amortization
Period. Upon the occurrence of an Amortization Event, if a receiver, conservator
or trustee in bankruptcy is appointed for a Subservicer or the Seller, and no
Amortization Event other than such appointment or respective insolvency of such
Subservicer or Seller exists, the receiver, conservator or trustee may have the
power to prevent the early sale or disposition of the Receivables and the
commencement of the Early Amortization Period. See "Certain Legal Aspects of the
Receivables -- Certain Matters Relating to Insolvency".
The Seller may, by agreement with the Deposit Trustee and the Owner
Trustee, amend the Pooling and Servicing Agreement and the Trust Agreement to
eliminate the provisions for dissolution of the trusts created thereby upon an
Insolvency Event of the Seller if it is determined, based upon an opinion of tax
counsel, that such provisions are no longer necessary to sustain the tax
treatment of those trusts. See "Description of the Deposit Trust -- Amendment."
While HFC is the Servicer, cash collections held by HFC may, subject to
certain conditions, be commingled and used for the benefit of HFC prior to each
Distribution Date. In the event of the insolvency or receivership of
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<PAGE> 24
HFC or, in certain circumstances, the lapse of certain time periods, the Deposit
Trust and the Issuer and Indenture Trustee may not have perfected security
interests in such collections. Unless otherwise agreed to by each nationally
recognized statistical rating organization selected by the Seller to rate the
interests of any Series or class, as specified in the applicable prospectus
(each, a "Rating Agency"), if the commercial paper rating of HFC is reduced
below A-1 or P-1 by the applicable Rating Agency, HFC will, within five Business
Days, be required to commence the deposit of collections directly into the
Collection Account within two Business Days of the day of processing.
As a business corporation, the Seller may be made the subject of a
bankruptcy or similar state law proceeding in appropriate circumstances. The
Seller will not engage in any activities except the transactions described
herein and as contemplated by the Receivables Purchase Agreement, the Trust
Agreement, the Pooling and Servicing Agreement and the Series 1997-2 Supplement
and similar transactions and activities incidental to, or necessary or
convenient to accomplish, the foregoing. The Seller does not have any current
intention to file a voluntary petition under the Bankruptcy Code of 1978, as
amended (the "Bankruptcy Code"), or any similar applicable state law.
Application of federal and state bankruptcy and debtor relief laws to any
obligors could affect the ability of the Noteholders to recover their full
investment if such laws result in any Receivables being written off as
uncollectible and the total of the Defaulted Amounts exceeds funds available
from the Overcollateralization Amount and the amounts otherwise distributable on
the Certificates.
LEGAL CONSIDERATIONS. The Credit Lines and Receivables are subject to
numerous federal and state consumer protection laws which impose requirements on
the solicitation, making, enforcement and collection of consumer loans. Such
laws, as well as any new laws which may be enacted and court rulings (including,
but not limited to, federal or state interest rate caps on consumer loans), may
adversely affect the Servicer's ability to collect on the Receivables. In
addition, failure by the Servicer to comply with such requirements could
adversely affect the Servicer's ability to enforce the Credit Lines or
Receivables.
Pursuant to the Pooling and Servicing Agreement, if the interest of the
Deposit Trust, and consequently the Noteholders, in a Receivable is materially
and adversely affected by the failure of the related Credit Line to comply in
all material respects with applicable requirements of law, all Receivables in
the affected Credit Line will be reassigned to the Seller, or, in some
circumstances, to the Servicer. Pursuant to the Pooling and Servicing Agreement,
the Seller makes certain other representations and warranties relating to the
validity and enforceability of the Credit Lines and the Receivables. However, it
is not anticipated that the Deposit Trustee or Indenture Trustee will make any
examination of the Credit Line Agreements or the records relating thereto for
the purpose of establishing the presence or absence of defects, compliance with
such representations and warranties, or for any other purpose. The sole remedy,
if any such representation or warranty is breached and such breach has a
material adverse effect on the interest of Noteholders in any Receivable and
continues beyond the applicable cure period, is that the Receivables affected
thereby will be reassigned to the Seller or assigned to the Servicer, as the
case may be. In addition, in the event of the breach of certain representations
and warranties, the Seller may be obligated to accept the reassignment of the
entire Deposit Trust portfolio. See "Description of the Deposit Trust --
Representations and Warranties".
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the Subservicers. In
addition, many states have other laws, such as consumer protection laws, unfair
and deceptive practices acts and debt collection practices acts which may apply
to the origination or collection of the Credit Lines and Receivables. Depending
on the provisions of the applicable law, violations of these laws may limit the
ability of the Subservicers to collect all or part of the principal of or
interest on the Credit Lines, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Subservicers, Seller and
possibly the Deposit Trust to damages and administrative enforcement.
The Credit Lines will also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Credit
Lines and related Credit Line Agreements; (ii) the Equal Credit Opportunity Act
and Regulation B promulgated thereunder, which prohibit discrimination on the
basis of age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the Consumer
Credit
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<PAGE> 25
Protection Act, in the extension of credit; and (iii) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Subservicers and the Deposit Trust to collect all or part of the
principal of or interest on the Credit Lines and in addition could subject the
Subservicers, and possibly the Seller or the Deposit Trust, to damages and
administrative enforcement.
GENERATION OF ADDITIONAL RECEIVABLES; DEPENDENCY ON BORROWER
REPAYMENTS. The full payment of the Security Balance of each class of Notes is
dependent on borrower repayments. A decrease in the effective yield on the
Receivables due to, among other things, an increase in the level of
delinquencies could result in decreased protection to Noteholders against
defaults under the Credit Lines. Further, the Receivables may be paid at any
time by the obligors thereof and there is no assurance that there will be
additional Receivables created under the Credit Lines, that Receivables will be
added to the Deposit Trust or that any particular pattern of borrower repayments
will occur.
SERIES 1997-2 PARTICIPATION. The Trust Assets consist primarily of the
Series 1997-2 Participation, which is an undivided beneficial interest in the
Receivables held by the Deposit Trust. As a beneficial interest, it does not
grant the Owner Trustee, the Indenture Trustee or the Noteholders any direct
rights with respect to the Receivables. Rather, it grants the Issuer, on behalf
of the Certificateholders, rights against the Deposit Trust which the Issuer has
pledged to the Indenture Trustee on behalf of the Noteholders. The Deposit
Trustee has covenanted that it will enforce its rights and perform its covenants
under the Pooling and Servicing Agreement and will cause the Seller to enforce
its rights and perform its covenants under the Receivables Purchase Agreement.
In the event the Issuer lacks sufficient funds to make payments due Noteholders,
and such lack of funds does not result from a default by the Servicer, Seller,
Owner Trustee or Deposit Trustee, there will be no recourse under the Pooling
and Servicing Agreement other than to rely upon the Servicer to pursue the
remedies available under the Credit Lines against obligors. Although it is
expected that the payment in final reduction of the Series 1997-2 Participation
will occur prior to the Distribution Date in November 2007, no assurance can be
given in this respect, and failure to receive final payment by such date will
not by itself create any additional rights or remedies under the Series 1997-2
Participation. In the event final payment in reduction of the Series 1997-2
Participation is not made by such date, an Event of Default will occur under the
Indenture. See "Description of the Securities -- Events of Default" herein.
Further, in the event of a bankruptcy of the Seller or the Deposit Trust, delays
or reductions in payments on the Series 1997-2 Participation and other adverse
consequences could result. See "Certain Legal Aspects of the Receivables --
Certain Matters Relating to Insolvency."
SOCIAL, LEGAL, ECONOMIC AND OTHER FACTORS. Changes in borrowing and payment
patterns by borrowers result from a variety of social, legal and economic
factors. Economic factors include the rate of inflation, unemployment levels,
tax law changes and relative interest rates. The Seller and the Subservicers are
unable to determine and have no basis to predict whether or to what extent tax
law changes or other economic or social factors will affect credit line use or
repayment patterns. See "The Revolving Consumer Credit Lines." As of the date of
this Prospectus, 20.79% (by Principal Balance) of the Receivables were generated
under Credit Lines originated by Subservicer branch offices located in
California. In the event economic conditions in a geographic area representing a
higher portion of the Pool Balance (such as California) are weaker than other
areas of the country, a higher rate of delinquency and/or charge-off may result.
DEPOSIT TRUST RISK FACTORS
ISSUANCE OF ADDITIONAL SERIES; VOTING POWER. The Issuer's principal asset
will be the Series 1997-2 Participation in the cash flows on the Receivables
held by the Deposit Trust. The Series 1997-2 Participation represents an
undivided beneficial interest in the Interest Collections (which include
Recoveries) and Principal Collections received during each Collection Period.
The Seller has caused five Series Participation Interests in the Deposit
Trust to be sold to support five Series of asset-backed securities. It is
expected that the principal balance of one of those Series Participation
Interests will be reduced to zero prior to issuance of the Notes. The Seller is
expected to cause additional trusts to be
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formed from time to time to issue additional Series of Household Consumer Loan
Asset Backed Notes or other securities. Series Participation Interests in the
assets of the Deposit Trust are expected to be the primary or sole assets
supporting those securities. The terms of each Series Participation Interest,
and therefore, the terms of any additional Series, will not be subject to the
prior review or consent of holders of any other Series, including the Series
1997-2 Securityholders. Such terms may include methods for determining
applicable participation percentages and allocating collections and provisions
creating different or additional security or other credit enhancements. The
obligation of the Deposit Trustee to issue any Series Participation Interest
supporting a new trust and Series is subject to the following conditions, among
others: (a) such issuance will not result in any Rating Agency reducing or
withdrawing its then existing rating of the Notes of any outstanding Series or
class with respect to which it is a Rating Agency (the notification in writing
by each Rating Agency to the Seller, the Servicer and the Deposit Trustee that
any action will not result in such a reduction or withdrawal is referred to
herein as the "Rating Agency Condition") and (b) the Seller shall have delivered
to the Deposit Trustee a certificate of any authorized officer to the effect
that, in the reasonable belief of the Seller, such issuance will not have an
Adverse Effect.
The rights of the holders of each Series to direct the voting of the
related Series Participation Interest will be governed by the documents pursuant
to which such additional Series are issued and may be different from such
provisions relating to the Series 1997-2 Participation. It is not expected that
the holders of the Series 1997-2 Securities will hold voting power sufficient to
direct any action with respect to the Deposit Trust. As additional Series
Participation Interests are issued and the Series 1997-2 Participation balance
is reduced, the relative interest of the holders of the Series 1997-2 Securities
in the Deposit Trust will be reduced, thereby further reducing the voting power
of such securities.
ADDITION OF ASSETS TO THE DEPOSIT TRUST. Under certain conditions, as more
fully described below, the Seller is permitted to designate certain additional
Credit Lines to the Deposit Trust. When a Credit Line is designated, the
respective Subservicer's records are revised to reflect that as of the date of
such designation all outstanding receivables under the Credit Line are assigned
by the applicable Subservicer to the Seller, and by the Seller to the Deposit
Trust. All receivables subsequently arising under a designated Credit Line will
also be assigned to the Seller and in turn, to the Deposit Trust. The Seller may
designate Credit Lines to the Deposit Trust in two ways. As required by the
Pooling and Servicing Agreement, New Credit Lines (as defined below) are
expected to be substantially similar to the Credit Lines currently designated to
the Deposit Trust. New Credit Lines may be designated to the Deposit Trust
without regard to the satisfaction of the Rating Agency Condition; however, the
number of Credit Lines that may be so designated is limited, as described below.
Subject to the Rating Agency Condition and certain other requirements, the
Seller is permitted to designate other credit lines (other than New Credit
Lines) as Credit Lines, the receivables from which will be conveyed to the
Deposit Trust. Such other credit lines are referred to herein as "Additional
Credit Lines." New Credit Lines and Additional Credit Lines are collectively
referred to herein as "Aggregate Additional Credit Lines." The Seller expects to
convey from time to time to the Deposit Trust the receivables arising under
certain Aggregate Additional Credit Lines in accordance with the provisions of
the Pooling and Servicing Agreement.
The Receivables which arise under Aggregate Additional Credit Lines
designated to the Deposit Trust may have different characteristics than the
Receivables currently assigned to the Deposit Trust. The Credit Lines which are
subsequently assigned to the Deposit Trust will be Eligible Credit Lines, but
may be subject to different origination criteria than the Credit Lines
designated to the Deposit Trust on the date of this Prospectus because they were
originated at a later date or were acquired from another originator of consumer
loans. In addition, Aggregate Additional Credit Lines may have different terms
than the existing Credit Lines, including lower periodic finance charges, which
may have the effect of reducing the average yield on the Credit Lines currently
designated to the Deposit Trust.
"New Credit Lines" may be designated in accordance with the following
limitations and conditions. First, a New Credit Line must be an Eligible Credit
Line of a type which (i) was designated to the Deposit Trust as an Initial
Credit Line or (ii) was previously designated to the Deposit Trust as an
Additional Credit Line provided that, in the assignment related to such addition
of Credit Lines, the Seller warranted that such type of revolving credit lines
are permitted to be designated as New Credit Lines. Second, unless each
applicable Rating Agency otherwise consents, the number and balance of New
Credit Lines designated as Credit Lines with respect to any of the three
consecutive Collection Periods shall not exceed 15% of the number and balance of
the Credit Lines as
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of the first day of such three month period and the number and balance of New
Credit Lines designated during any consecutive twelve month period shall not
exceed 20% of the number and balance of the Credit Lines as of the first day of
such twelve consecutive month period. Third, the Seller shall deliver to the
Trustee, at least semi-annually, an opinion of counsel with respect to the New
Credit Lines included as Credit Lines confirming the validity and perfection of
each transfer of such New Credit Lines. If such opinion of counsel with respect
to any New Credit Lines is not so received, all Receivables arising in the New
Credit Lines to which such failure relates will be removed from the Deposit
Trust. Fourth, the Seller will designate New Credit Lines subject to the
conditions, among others, that (i) the conveyance of the Receivables therein
will not result in the occurrence of any Amortization Event and (ii) such
conveyance shall not have been made in contemplation of an Insolvency Event with
respect to the Seller or the applicable Subservicer.
"Eligible Credit Line" means (a) a revolving consumer credit line owned by
(i) a Subservicer and its respective successors and assigns and/or any
transferee of the credit lines from any such entity or any other originator of
credit lines which enters into a receivables purchase agreement with the Seller
or any additional Seller and (ii) which, as of the respective date of
designation, is in existence and maintained by a Subservicer or such successors,
transferees or originator, is payable in United States dollars, has an obligor
whose address is in the United States, has an obligor who has not been
identified as being involved in any voluntary or involuntary bankruptcy
proceeding, has not been sold or pledged to any other party except for any
transferee referred to above and does not have receivables which have been sold
or pledged to any other party and has not been charged-off; or (b) any other
credit line acceptable to the Rating Agency.
The Seller will also be permitted to designate Eligible Credit Lines as
Additional Credit Lines under the following conditions, among others. First,
except in the limited circumstances described below, Additional Credit Lines
must be revolving consumer credit lines established pursuant to a credit line
agreement between a Subservicer or any additional seller and the person or
persons obligated to make payments thereunder, which are designated by the
Seller to be included as Additional Credit Lines. Second, such addition must
satisfy the Rating Agency Condition. Third, the Seller must deliver to the
Deposit Trustee a certificate of an authorized officer to the effect that, in
the reasonable belief of the Seller, such addition will not have any Adverse
Effect.
THE SELLER AND SUBSERVICERS
The Seller was incorporated under the laws of the State of Nevada on July
27, 1995 and is a wholly-owned special purpose subsidiary of HFC. The Seller was
organized for the limited purposes of engaging in the type of transactions
described herein and other similar transactions and any activities incidental to
and necessary or convenient for the accomplishment of such purposes. Neither
HFC's nor the Seller's board of directors intends to change the business purpose
of the Seller. The Seller's principal executive office is located at 1111 Town
Center Road, Las Vegas, Nevada 89134.
The Subservicers are wholly-owned subsidiaries of HFC that are licensed,
where required, to make revolving consumer credit line loans in the states in
which the Credit Lines are originated. These companies originate revolving
consumer credit line loans and, in some cases, other types of secured and
unsecured consumer loans from branch offices located in the states in which they
are licensed to do business and with respect to telemarketing and direct mail
solicitations, from a centralized facility.
Each Receivable will be sold to the Deposit Trust by the Seller at a price
equal to its balance as of the date it is assigned to the Deposit Trust plus the
excess spread for such Credit Line less the Principal Discount applicable
thereto, if any, and will be subserviced by the appropriate Subservicer on
behalf of HFC as Servicer. The Servicer will be entitled to retain, on behalf of
itself and the Subservicers, the Servicing Fee.
THE SERVICER
HFC was incorporated in Delaware in 1925, as successor to an enterprise
which traces its origin through the same ownership to an office established in
1878. HFC will be responsible for acting as the Servicer for the Credit Lines.
HFC is a subsidiary of Household International, Inc. The address of its
principal executive office is 2700 Sanders Road, Prospect Heights, Illinois
60070. Its telephone number is (847) 564-5000.
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<PAGE> 28
HFC and its subsidiaries offer a diversified range of financial services.
Their principal business is the making of cash loans, including secured and
unsecured consumer loans and home equity loans secured by first and second
mortgages, directly to consumers in the United States. Loans are made through
branch lending offices and by direct mail or telemarketing. HFC, through banking
subsidiaries, also offers both VISA* and MasterCard* credit cards to residents
throughout the United States.
In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life and, credit accident
and health insurance. Credit life and credit accident and health insurance are
generally directly written by or reinsured with HFC's insurance subsidiary,
Household Life Insurance Company.
As of September 30, 1997, HFC had approximately $22.3 billion in total
assets, approximately $18.4 billion in total liabilities and approximately $3.9
billion in shareholder's equity.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes and the
Certificates will be used by the Seller for general corporate purposes.
THE HFC REVOLVING CONSUMER CREDIT LINES
GENERAL
HFC and its subsidiaries originate various consumer loan products which are
of two basic types. "Personal Unsecured Credit Lines" are fixed or variable rate
revolving unsecured lines of credit which are accessed through personalized
checks issued to borrowers. "Personal Homeowner Credit Lines" are fixed or
variable rate revolving lines of credit which are also accessed through
personalized checks issued to borrowers. Personal Homeowner Credit Lines are
secured by a security interest filed against the borrower's home; however,
generally no independent appraisal of property value or title search is
performed and no title insurance is obtained to insure HFC's interest in the
property. Because an appraisal or title insurance is not generally required to
be obtained with respect to Personal Homeowner Credit Lines and applications for
such credit lines are underwritten using guidelines for unsecured lines, HFC
services such loans as an unsecured product. Because such Credit Lines are
serviced as unsecured, under the Servicing Guidelines (as defined herein), as
requested by a borrower, Subservicers will generally subordinate any lien to any
subsequent lien on the property.
Unsecured consumer loans have been originated by HFC and its subsidiaries
for in excess of 100 years and Personal Homeowner Credit Lines have been
originated by HFC and its subsidiaries since 1989. As of September 30, 1997, HFC
and its subsidiaries had approximately $5.9 billion aggregate amount of such
outstanding credit line receivables, including receivables sold with servicing
performed by HFC and its subsidiaries.
Prospective applicants for HFC's and its subsidiaries' consumer credit line
products are solicited in a variety of methods including branch office sales,
direct mail and telemarketing. The direct mailings may include pre-approved
credit lines to consumers who may or may not be current or former customers of
HFC or its affiliates.
UNDERWRITING PROCEDURES RELATING TO THE REVOLVING CONSUMER CREDIT LINES
With respect to consumer credit line applications received by HFC or its
subsidiaries, each application is subjected to a direct credit investigation by
the related Subservicer prior to the extension of credit. This investigation
generally includes (i) obtaining and reviewing an independent credit bureau
report, (ii) verifying ownership of the property and any senior mortgage balance
(in the case of a Personal Homeowner Credit Line), (iii) verifying payment
history, which may be obtained from credit bureau information, provided it has
been updated within two months of the application or, in the case of a Personal
Homeowner Credit Line, if the credit
- ---------------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
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<PAGE> 29
bureau information has not been updated within two months of the application, it
may be obtained in writing or by telephone from the holder of any senior lien,
and (iv) verification of employment on all Personal Unsecured Credit Lines and
on some Personal Homeowner Credit Lines, which may include obtaining a W-2 form
or paystub, a minimum of two years of tax returns for self-employed individuals
or other written or telephone verification with employers.
After this investigation is conducted, a decision is made to accept or
reject the application. A limit on the amount of credit to be extended to the
borrower is assigned based on the Subservicer's assessment of the borrower's
ability to pay (a "Credit Limit"). Under current policies, the maximum Credit
Limits which may be assigned to Personal Homeowner Credit Lines and to Personal
Unsecured Credit Lines are $25,000 and $15,000, respectively. However, within
certain parameters established by the Subservicers, on an exceptional basis,
borrowers may exceed their Credit Limits by an amount generally not in excess of
$2,000 above their Credit Limit. Generally, all prospective borrowers must have
a debt-to-income ratio of no greater than 45% but such limitation may be waived
by management. Only in limited circumstances will a debt-to-income ratio exceed
60%. For purposes of calculating the debt to income ratio, debt is defined as
the sum of any mortgage payment, including escrow payments for the hazard
insurance premium, real estate taxes, mortgage insurance premium, owners
association dues and ground rents, plus payments on installment debt that
extends beyond 10 months and revolving debt (including payments on the consumer
credit line computed based on the Credit Limit applied for at the then current
Loan Rate), and alimony, child support or maintenance payments, and income is
defined as stable monthly gross income from the borrower's primary source of
employment, plus acceptable secondary income.
With respect to solicitations of prospective customers for a pre-approved
credit line who have no existing credit relationship with HFC or its affiliates,
selection is made based upon certain information obtained through proprietary
and acquired databases, which information includes credit history and income
levels. The Credit Limit for a pre-approved credit line to a borrower with no
existing credit relationship with HFC is initially established at an amount not
in excess of $5,000 and may be increased following a complete evaluation by HFC
or its subsidiary of an updated credit bureau report and verification of certain
other information, as discussed above with respect to consumer generated credit
line applications.
Existing customers of HFC and its affiliates, and prospective customers
with no existing relationship with HFC or its affiliates, may receive
pre-approved credit lines which may be activated by cashing a check enclosed in
the notice of pre-approval sent to the borrower. The determination as to which
existing and prospective customers will receive a pre-approved line of credit
and the amount of the Credit Limit are made based upon available credit
information using the same criteria discussed above with respect to consumer
generated applications and, in the case of existing customers, consideration of
prior payment history with HFC and its affiliates.
REVOLVING CONSUMER CREDIT LINE TERMS
The borrower may access the revolving line of credit by writing a check or
by cashing a check issued by the Subservicer to the borrower. Except in certain
circumstances related to collection efforts, the "Minimum Monthly Payment" for
each Credit Line is the greatest of (i) a specified percentage (which generally
ranges between 1.43% and 3.40% of the Principal Balance depending upon the state
in which the loan was originated, the related interest rate and the actual loan
product) of the principal balance of the Credit Line, plus currently payable
late charge fees, bad check fees and other fees (the "Administrative Charges")
and credit insurance charges, (ii) a designated minimum dollar amount, which is
generally $25 plus Administrative Charges and credit insurance charges, (iii)
the amount of accrued interest during the related billing cycle plus
Administrative Charges and credit insurance charges and (iv) the amount of the
annual fee assessed on the credit line. However, in some instances, the Minimum
Monthly Payment may exceed the formula set forth above. A borrower's minimum
monthly payment is due on a fixed date each month which is between 22 and 25
days after the Cycle Date for the borrower's particular Credit Line. "Cycle
Dates" for the Credit Lines are the 4th, 5th, 6th, 8th, 10th, 11th, 12th, 16th,
17th, 18th, 19th, 20th, 25th and 26th of every month. For example, if the Cycle
Date for a Credit Line is on the 5th day of the month, an update of the Credit
Line is completed at the close of business on the 5th. A detailed listing of all
debits and credits along with the Minimum Monthly Payment and available line of
credit is listed on
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<PAGE> 30
the borrower's billing statement. The billing statement would be sent to the
borrower on the 5th and payment would be due on the 27th of the month.
"Variable Rate Credit Lines" bear interest at rates which may change from
month to month subject to maximum and minimum per annum rates, if any, specified
in the Credit Line Agreement. The monthly periodic rate (the "Loan Rate") for a
Variable Rate Credit Line is one-twelfth of the sum of the Index Rate (as
defined below) plus a certain spread (the "Margin"), generally ranging from 9.9%
to 17.9%. The Loan Rate assigned to each "Fixed Rate Credit Line" is a fixed
rate generally ranging from 18.0% to 27.9%. The variable or fixed rates of
interest charged on a revolving consumer line of credit are determined by the
overall qualification of the borrower and market conditions. Interest on the
revolving consumer lines of credit is payable at the Loan Rate monthly in
arrears on the average daily outstanding principal balance.
For Variable Rate Credit Lines, the "Index Rate" during a billing cycle is
the "prime rate" published by The Wall Street Journal on the first publication
date of the month in which the related billing cycle begins. If a prime rate
range is published, then the average of that range will be used for Credit Lines
established prior to October 1, 1991 and for most other Credit Lines established
on or after October 1, 1991 the highest rate in such range will be used. When a
change in the prime rate is published, a change in the Loan Rate will take
effect on the first day of the billing cycle following the date of the published
change and the new Loan Rate will apply to new loans and charges, as well as to
the existing Loan Balance. The Credit Line Agreements further provide that in
the event of a change in law or any court ruling that prohibits a Subservicer
from using the Index Rate, or if the publication of the Index Rate is
discontinued, the related Subservicer will change the Index Rate upon
notification of such event in accordance with the Credit Line Agreement.
Principal amounts may be drawn upon (up to the Credit Limit of the Credit
Line, and in certain cases in excess of the Credit Limit) from time to time.
Except for any amortization of principal which may occur as a result of the
required Minimum Monthly Payments, there are no required payments of principal,
except that the outstanding principal amount of Personal Homeowner Credit Lines
will be due fifteen years from origination. Other than Personal Unsecured Credit
Lines originated in Arizona which have a maximum maturity of 20 years, assuming
no further draws and payment of the Minimum Monthly Payment, Personal Unsecured
Credit Lines will not fully amortize during the life of the borrowers. Upon the
death of any borrower with respect to such a Credit Line, the Principal Balance
may be accelerated; however, the Subservicers may continue to accept payments
made on such Credit Line. Based upon the Subservicers' experience it is expected
that borrowers will generally pay off all balances during their lifetime. See
"Risk Factors -- Cash Flow Considerations" herein. The Loan Rate for a Variable
Rate Credit Line will in no event exceed the maximum rate permitted under
applicable state law. With the exception of Credit Lines originated to Arizona
borrowers, the Variable Rate Credit Lines have no periodic interest rate
adjustment caps. The Loan Rate for Arizona Variable Rate Credit Lines may not
increase or decrease in excess of three percentage points during any 12 month
period or more than seven percentage points over the life of the Credit Line.
Subject to applicable law, the Subservicers have the right under each
Credit Line to change its terms. Changes may apply to both new and outstanding
balances unless prohibited by applicable law. However, termination of a
borrower's Credit Limit generally will occur only as provided below. No other
party will have the right to amend or require amendments to the Credit Lines.
The Subservicers will also have the right to employ certain promotions with
respect to the Credit Lines. These promotions will be offered to certain
preferred customers who meet payment and credit history criteria established by
the Subservicers from time to time. These promotions may be offered periodically
but are not expected to be offered more than twice a year to qualifying
borrowers. The promotions are offered only in certain states and may include
programs under which the applicable Subservicer will make Minimum Monthly
Payments on behalf of the borrowers or will permit the borrowers to not make
Minimum Monthly Payments without being assessed a late charge or considered
delinquent. In the event a borrower is not required to make a Minimum Monthly
Payment and no Subservicer payment is made on behalf of the borrower, interest
will accrue on the Credit Line during such month and will accrue in the future
on the amount of such unpaid payment. The effect of this promotion will be to
increase the accrued yield on the Receivables and to decrease collections during
the
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month in which the promotion is in effect. It is not expected that any
promotional programs offered by the Subservicers will have an adverse impact on
Securityholders.
The Subservicers will have the right to require a borrower to immediately
pay the entire balance plus all other accrued but unpaid charges and to cancel
any credit privileges under the Credit Line Agreement if, among other things,
the borrower fails to make one or more payments when due under a Personal
Unsecured Credit Line, or two or more payments when due under a Personal
Homeowner Credit Line, the borrower has provided false, misleading or incorrect
material information to the Subservicer, frequent advances are requested by the
borrower over the Credit Limit, the borrower dies, a bankruptcy petition is
filed by or against the borrower or the borrower defaults under the Credit Line
Agreement. In addition, with respect to Personal Homeowner Credit Lines,
Subservicers may accelerate the entire balance and all other charges and cancel
credit privileges if the borrower sells any interest in the property securing a
Personal Homeowner Credit Line (including the creation of a subordinate lien),
foreclosure or condemnation proceedings are instituted on the property by any
lien holder or governmental agency, the borrower incurs any lien on the property
which adversely affects the property or the Subservicer's rights in the property
or the borrower fails to maintain the property, fails to pay the real estate
taxes on the property, fails to keep the property insured, or abandons the
property. Additionally, with respect to Personal Homeowner Credit Lines, the
Subservicers will have the right to reduce the Credit Limit or prohibit
additional advances under the Credit Line Agreement if, among other things, a
material change in the financial condition of the borrower has occurred, the
maximum annual percentage rate under the Credit Line Agreement is attained, or
any borrower under the Credit Line Agreement so requests.
In the event of a default on a mortgage that is senior to any Personal
Homeowner Credit Line, the related Subservicer will have the right in many
states to pay off a defaulted senior mortgage or cure such default and pay any
past due amounts on the senior mortgage. In either case, any amounts expended in
connection with such pay off or cure will be added to the then current loan
balance for such Credit Line. However, it is not expected that the Subservicers
will take such action with respect to any Personal Homeowner Credit Line, and no
party has the right to require the Subservicers to do so.
SERVICING OF REVOLVING CONSUMER CREDIT LINES
HFC will be responsible for servicing the Credit Lines. The Subservicers
will perform the servicing activities on behalf of HFC in accordance with HFC's
policies and procedures for servicing revolving consumer credit lines.
Servicing activities, including collection on delinquent credit lines, is
performed by or on behalf of the Subservicers from facilities in California,
Illinois, and Maryland. Following charge-off of a delinquent credit line,
collection efforts are performed by a subsidiary of the Servicer located in
Virginia. In the effort to collect upon delinquent credit lines, attempts are
made to contact the borrower to determine both ability and intent to pay. In
accordance with the policies and procedures of HFC and the Subservicers
regarding the servicing of credit lines (the "Servicing Guidelines") and
reasonable commercial practice, appropriate action may be taken in the
discretion of the Subservicer, including, but not limited to, extended payment
arrangements, forbearance, deferment pending a change in circumstances, referral
for legal action and account restructuring. A credit line is considered
contractually delinquent if less than 50% of any Minimum Monthly Payment due
from a borrower has not been received by the Subservicer or if the borrower has
submitted three consecutive payments each of which are greater than 50% but less
than 100% of the Minimum Monthly Payment then due. Generally, credit lines that
are in excess of 26 days delinquent may be restructured once during a six month
period after the borrower makes, in one or more payments, at least 95% of one
Minimum Monthly Payment in either the current or prior month. When a credit line
is restructured, it is no longer considered delinquent. Under the Subservicers'
current Servicing Guidelines, which became effective January 1, 1996, a credit
line is generally charged off when it becomes 300 days contractually delinquent
and the aggregate of all payments made in any two consecutive months during the
last six calendar months was not greater than or equal to 50% of a Minimum
Monthly Payment, or in any event, when it becomes 570 days contractually
delinquent, regardless of any partial payments received in prior months (the
"Recency Charge-off Policy"). Management of the Subservicers may, in its sole
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discretion, chargeoff a credit line earlier than specified in the Recency
Charge-off Policy if it believes no further payments will be collected with
respect to such credit line. Prior to implementation of the Recency Charge-off
Policy on January 1, 1996, in all states other than California, Colorado,
Illinois and Missouri, a credit line was generally charged-off when it became
300 days contractually delinquent. During various periods in 1995, the
Subservicers tested alternative charge-off policies in the four states listed
above in anticipation of employing a revised uniform policy. From April 1, 1995
to September 1, 1995, for all credit lines originated in Colorado and Illinois
and from May 1, 1995 to September 1, 1995 for credit lines originated in
Missouri, a charge-off policy was employed under which a credit line was
charged-off if it became contractually delinquent and when all payments received
during the prior 180 days did not aggregate to at least 50% of one Minimum
Monthly Payment. The Recency Charge-off Policy has been employed since September
1, 1995 for credit lines originated in California, Colorado, Illinois and
Missouri.
The Servicer has the option to repurchase from the Deposit Trust all
Receivables which are delinquent prior to the date such Receivables would be
charged-off. Such repurchase will be accomplished by deducting the balance
thereof from the Seller's Trust Amount, provided that the Seller's Trust Amount
is not reduced below 1.01% of the aggregate invested amounts or certificate
principal balances, as specified in each Series Supplement to the Pooling and
Servicing Agreement for all outstanding Series Participation Interests.
Once a credit line has been charged-off, it is deemed removed from the
Deposit Trust by the Seller. In such case, the Subservicer may assign the credit
line to a collection agency or initiate legal action for collection. Amounts
collected or received with respect to Defaulted Credit Lines, net of costs and
expenses of recovery ("Recoveries") will be deposited into the Collection
Account.
The delinquency and charge-off policies and collection practices discussed
herein may change over time in accordance with the Servicer's business judgment,
changes in the Subservicers' revolving consumer credit line agreements,
applicable laws and regulations, and other considerations.
The tables below present revolving consumer credit line data applicable to
substantially all of the United States operations of HFC, including loans
managed in states which are not represented in the pool consisting of the Credit
Lines and include loans sold with servicing performed by HFC and its
subsidiaries. The information in the tables has not been adjusted to eliminate
the effect of the significant growth in the size of HFC's and its subsidiaries'
revolving consumer credit line portfolio during the periods shown, particularly
from 1993 to 1996. Accordingly, delinquency and gross charge-offs as a
percentage of receivables or average receivable balance serviced, respectively,
for each period would be higher than those shown if a group of Credit Lines were
artificially isolated at a point in time and the information showed the activity
only in that isolated group. It should also be noted that if the Recency
Charge-off Policy currently employed had been applied prior to 1996, the
historical delinquency rates reported for years prior to 1996 would be higher,
while the historical charge-off rates reported would be reduced without any
improvement of the actual payment experience in the related Credit Lines.This is
the case because under the Recency Charge-off Policy, Credit Lines remain in a
delinquent status longer prior to charge-off. The rise in Portfolio
delinquencies in 1996 and 1997 is in part due to this factor. The slower growth
of the Portfolio in the current year is also a factor in the Portfolio
delinquency and gross charge-off percentages reported as of August 31, 1997. The
general increase in personal bankruptcy filings in the United States has had an
impact on the charge-off experience in the Portfolio. There can be no assurance
that the rate of such filings will remain constant, increase or decrease over
time. There is also no assurance that future credit and revenue performance of
the Portfolio will be consistent with the information set forth in the tables
below as changes in social, legal, economic and competitive conditions are
likely to affect the payment patterns of borrowers. In particular, it is unclear
what impact rate increases may have on the delinquency, charge-off, prepayment
and revenue experience of the Portfolio. See "Risk Factors -- Nature of
Underlying Assets",
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"-- Cash Flow Considerations", "-- Changes in Loan Terms and Finance Charges"
and "-- Social, Legal, Economic and Other Factors" herein.
REVOLVING CONSUMER CREDIT LINE
DELINQUENCY EXPERIENCE FOR THE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AS OF
-------------------------------------------------------------- AUGUST 31,
1992 1993 1994 1995(1) 1996(1) 1997(1)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of credit lines managed(2).... 572,346 559,880 669,687 713,802 749,270 762,228
Aggregate receivable balance of
credit lines managed............... $2,190,537 $2,356,840 $3,067,112 $3,790,410 $4,813,990 $5,175,133
Receivable balance of credit lines
2-3 payments past due.............. $ 71,233 $ 65,929 $ 76,756 $ 110,447 $ 139,705 $ 181,062
Receivable balance of credit lines 3+
payments past due.................. $ 149,526 $ 132,913 $ 137,899 $ 192,347 $ 281,342 $ 359,700
Receivable balance of credit lines 2+
payments past due.................. $ 193,182 $ 173,849 $ 185,028 $ 258,089 $ 369,102 $ 469,935
Receivable balance of credit lines 2+
payments past due as a percentage
of aggregate receivable balance of
credit lines managed............... 8.82% 7.38% 6.03% 6.81% 7.67% 9.08%
</TABLE>
- -------------------------
(1) Based upon the contractual delinquency and the charge-off policies employed
by the Subservicers as described on pages 31-32.
(2) "Credit lines managed" includes credit lines owned and credit lines serviced
with limited recourse.
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REVOLVING CONSUMER CREDIT LINE
GROSS CHARGE-OFF EXPERIENCE FOR THE PORTFOLIO
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- AUGUST 31,
1992 1993 1994 1995(1) 1996(1) 1997(1)(5)
---------- ---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of credit lines
managed(2)................. 572,346 559,880 669,687 713,802 749,270 762,228
Gross charge-offs............ $ 182,563 $ 162,654 $ 145,481 $ 168,337 $ 252,777 $ 240,848
Average receivable
balance(3)................. $2,174,470 $2,241,992 $2,587,639 $3,467,095 $4,310,606 $4,979,837
Gross charge-offs
percentage(4).............. 8.40% 7.25% 5.62% 4.86% 5.86% 7.25%
</TABLE>
- -------------------------
(1) Based upon the contractual delinquency and the charge-off policies employed
by the Subservicers as described on pages 31-32.
(2) "Credit lines managed" includes credit lines owned and credit lines serviced
with limited recourse.
(3) Average receivable balance is the average of the monthly average receivable
balances.
(4) Gross charge-offs as a percentage of the average receivable balance.
(5) Percent annualized.
The revenues for HFC's and its subsidiaries' consumer credit line portfolio
from finance charges and fees collected from borrowers are set forth in the
following table for each of the periods shown. The historical revenue figures in
the table include interest and fees collected during the cycle. Cash collections
on the Receivables may not reflect the historical experience in the table.
REVOLVING CONSUMER CREDIT LINE
REVENUE EXPERIENCE FOR THE PORTFOLIO
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- AUGUST 31,
1992 1993 1994 1995 1996 1997(1)(3)
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average receivable
balance(1)................ $2,174,470 $2,241,992 $2,587,639 $3,467,095 $4,310,606 $4,979,837
Total finance charges and
fees collected............ $ 395,979 $ 392,569 $ 443,115 $ 617,422 $ 745,859 $ 582,251
Total finance charges and
fees collected as a
percentage
of average receivables
balance(2)................ 18.21% 17.51% 17.12% 17.81% 17.30% 17.54%
</TABLE>
- -------------------------
(1) Average receivable balance is the average of the monthly average receivable
balances.
(2) Represents finance charges and fees collected divided by the average
receivable balance.
(3) Percent annualized.
The revenues for HFC's and its subsidiaries' consumer credit line portfolio
shown in the tables above are related to finance charges, together with fees,
collected from borrowers. Charges accrued and billed generally would be higher,
if shown, than amounts collected. Revenues related to finance charges and fees
also depend on the types of charges and fees assessed on the credit lines in the
Portfolio. Accordingly, revenues will be affected by changes in the types of
charges and fees assessed on the credit lines and other factors. See "Certain
Legal Aspects of the Receivables -- Potential Legislation". Neither the Servicer
nor any of its affiliates has any basis to predict how any future changes in the
usage of credit lines by borrowers or in the terms of credit lines may affect
the revenue for the Portfolio.
34
<PAGE> 35
THE REVOLVING CONSUMER CREDIT LINES
The Receivables are evidenced by loan agreements (each, a "Credit Line
Agreement") originated in 43 states. The term to maturity of Personal Homeowner
Credit Lines at origination is fifteen years. Other than Personal Unsecured
Credit Lines originated in Arizona which have a maximum maturity of 20 years,
assuming no further draws and payment of the Minimum Monthly Payment, Personal
Unsecured Credit Lines will not fully amortize during the life of the borrowers.
The Principal Balances of such Credit Lines will be due upon the death of any
borrower under such Credit Lines.
Each Credit Line was originated between August 1979 and September 1997 in
the ordinary course of the related Subservicer's revolving consumer credit line
program. As of the Series 1997-2 Cut-Off Date, the average principal balance of
the Receivables was approximately $6,131.23. As of the Series 1997-2 Cut-Off
Date the weighted average loan utilization rate (computed by dividing the
Principal Balance for each Credit Line as of the Series 1997-2 Cut-Off Date by
the related Credit Limit, which, in cases where credit privileges have been
terminated, may be the Principal Balance as of the Series 1997-2 Cut-Off Date)
was approximately 75.95%.
The Fixed Rate Credit Lines have Loan Rates ranging from 0.00% to 36.00%
per annum, with a weighted average loan rate as of the Series 1997-2 Cut-Off
Date of 18.73% per annum. Each Variable Rate Credit Line, has an Index Rate
equal to the prime rate. The Variable Rate Credit Lines have loan margins
ranging from 0.00% to 34.40% per annum, with a weighted average loan margin as
of the Series 1997-2 Cut-Off Date of 13.07% per annum.
Set forth below is a description of certain characteristics of the
Receivables and Credit Lines as of the Series 1997-2 Cut-Off Date. The potential
future rate increases described in "Risk Factors -- Changes in Loan Terms and
Finance Charges" with respect to some or all of the Credit Lines may cause an
increase in prepayments, delinquency and yield with respect to the affected
Credit Lines. Such changes may alter the characteristics of the Credit Lines as
set forth in the tables below. However, it is not expected that such changes
will materially alter such characteristics or the aggregate credit performance
and revenue experience of the Credit Lines.
COMPOSITION OF CREDIT LINES BY LOAN TYPE
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOAN TYPE CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
--------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Personal Unsecured Credit Line...... 583,465 86.66% $2,889,549,279.26 70.00%
Personal Homeowner Credit Line...... 89,778 13.34 1,238,257,850.15 30.00
------- ------ ----------------- -------
Total.......................... 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
35
<PAGE> 36
COMPOSITION OF CREDIT LINES BY PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CREDIT LINE NUMBER OF % OF PRINCIPAL % OF POOL BY
PRINCIPAL BALANCE CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
----------------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
$ 0 and below................... 66,567 9.89% $ (866,565.39) (0.02)%
1 to 1,000................... 29,906 4.44 14,080,405.60 0.34
1,001 to 2,000................... 60,375 8.97 94,708,001.65 2.29
2,001 to 3,000................... 93,279 13.86 233,147,009.35 5.65
3,001 to 4,000................... 59,990 8.91 210,328,076.55 5.10
4,001 to 5,000................... 59,502 8.84 271,686,067.97 6.58
5,001 to 6,000................... 45,657 6.78 251,525,515.06 6.09
6,001 to 7,000................... 33,976 5.05 221,280,582.43 5.36
7,001 to 8,000................... 31,843 4.73 239,630,254.83 5.81
8,001 to 9,000................... 23,515 3.49 200,031,120.48 4.85
9,001 to 10,000................... 34,686 5.15 332,902,355.44 8.06
10,001 to 11,000................... 17,239 2.56 180,531,428.11 4.37
11,001 to 12,000................... 14,409 2.14 165,934,948.52 4.02
12,001 to 13,000................... 13,229 1.96 165,719,577.39 4.01
13,001 to 14,000................... 14,677 2.18 198,741,983.22 4.81
14,001 to 15,000................... 34,528 5.13 503,183,856.95 12.19
15,001 to 16,000................... 6,524 0.97 100,649,800.95 2.44
16,001 to 17,000................... 2,210 0.33 36,491,843.66 0.88
17,001 to 18,000................... 2,051 0.30 35,948,913.29 0.87
18,001 to 19,000................... 1,993 0.30 36,948,589.10 0.90
19,001 to 20,000................... 3,572 0.53 69,851,543.40 1.69
20,001 to 21,000................... 2,211 0.33 45,315,267.29 1.10
21,001 to 22,000................... 1,436 0.21 30,886,737.21 0.75
22,001 to 23,000................... 1,481 0.22 33,387,650.41 0.81
23,001 to 24,000................... 2,395 0.36 56,501,811.03 1.37
24,001 to 25,000................... 9,789 1.45 240,495,203.60 5.83
25,000 and over.................... 6,203 0.92 158,765,151.31 3.85
------- ------ ----------------- -------
Total.......................... 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
36
<PAGE> 37
COMPOSITION OF CREDIT LINES BY GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
STATE CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
----- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Alabama........................... 4,507 0.67% $ 27,239,286.29 0.66%
Arizona........................... 10,336 1.54 59,207,498.09 1.43
California........................ 115,423 17.18 858,098,286.83 20.79
Colorado.......................... 10,040 1.49 52,033,916.10 1.26
Connecticut....................... 8,647 1.28 52,651,617.04 1.28
Delaware.......................... 3,654 0.54 22,422,171.58 0.54
Florida........................... 48,830 7.25 301,393,770.96 7.30
Georgia........................... 12,235 1.82 95,175,766.36 2.31
Idaho............................. 1,516 0.23 6,458,360.74 0.16
Illinois.......................... 32,395 4.81 158,143,002.21 3.83
Indiana........................... 14,158 2.10 74,318,427.86 1.80
Iowa.............................. 4,061 0.60 15,675,428.81 0.38
Kansas............................ 8,354 1.24 54,375,033.21 1.32
Kentucky.......................... 497 0.07 5,889,018.25 0.14
Louisiana......................... 2,479 0.37 11,721,512.81 0.28
Maryland.......................... 26,510 3.94 171,253,678.11 4.15
Massachusetts..................... 7,301 1.08 76,839,651.21 1.86
Michigan.......................... 51,392 7.63 294,956,603.53 7.15
Minnesota......................... 9,053 1.34 42,287,327.86 1.02
Mississippi....................... 2,471 0.37 9,990,047.63 0.24
Missouri.......................... 20,494 3.04 111,410,970.58 2.70
Montana........................... 498 0.07 2,350,132.02 0.06
Nebraska.......................... 296 0.04 3,597,349.70 0.09
Nevada............................ 5,991 0.89 37,858,762.40 0.92
New Hampshire..................... 3,176 0.47 18,788,794.31 0.46
New Jersey........................ 11,522 1.71 78,381,056.55 1.90
New Mexico........................ 3,647 0.54 19,399,920.72 0.47
New York.......................... 54,751 8.13 312,629,578.18 7.57
North Carolina.................... 18,083 2.69 144,467,091.50 3.50
Ohio.............................. 39,069 5.80 201,416,655.71 4.88
Oklahoma.......................... 6,305 0.94 36,512,796.37 0.88
Oregon............................ 6,383 0.95 33,609,514.20 0.81
Pennsylvania...................... 41,584 6.18 239,397,377.77 5.80
Rhode Island...................... 2,490 0.37 14,403,639.49 0.35
South Carolina.................... 8,669 1.29 47,837,254.39 1.16
South Dakota...................... 686 0.10 1,621,125.56 0.04
Tennessee......................... 11,411 1.69 56,799,898.79 1.38
Texas............................. 10,590 1.57 51,496,389.72 1.25
Utah.............................. 2,126 0.32 8,811,717.38 0.21
Virginia.......................... 25,548 3.79 161,931,792.97 3.92
Washington........................ 20,163 2.99 117,118,974.85 2.84
Wisconsin......................... 5,431 0.81 36,819,528.11 0.89
Wyoming........................... 471 0.07 1,016,402.66 0.02
------- ------ ----------------- -------
Total........................ 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
- -------------------------
(1) Location is determined by the location of the applicable Subservicer's
branch office which originated the credit line.
37
<PAGE> 38
COMPOSITION OF CREDIT LINES BY CREDIT LIMIT
<TABLE>
<CAPTION>
NUMBER OF % OF % OF POOL BY
CREDIT LIMIT CREDIT LINES CREDIT LINES PRINCIPAL OUTSTANDING PRINCIPAL OUTSTANDING
------------ ------------ ------------ --------------------- ---------------------
<S> <C> <C> <C> <C>
$ 0............................ 112,145 16.66% $ 532,529,444.68 12.90%
1 to 1,000.................. 2,098 0.31 665,343.43 0.02
1,001 to 2,000.................. 9,399 1.40 11,877,769.23 0.29
2,001 to 3,000.................. 70,237 10.43 135,836,157.25 3.29
3,001 to 4,000.................. 53,551 7.95 126,302,204.95 3.06
4,001 to 5,000.................. 61,153 9.08 189,086,879.13 4.58
5,001 to 6,000.................. 42,845 6.36 164,362,373.57 3.98
6,001 to 7,000.................. 31,099 4.62 137,170,303.70 3.32
7,001 to 8,000.................. 34,916 5.19 180,611,970.39 4.38
8,001 to 9,000.................. 21,394 3.18 120,819,770.40 2.93
9,001 to 10,000.................. 55,120 8.19 381,694,702.17 9.25
10,001 to 11,000.................. 12,727 1.89 91,907,992.00 2.23
11,001 to 12,000.................. 17,917 2.66 145,678,423.74 3.53
12,001 to 13,000.................. 15,864 2.36 125,566,251.07 3.04
13,001 to 14,000.................. 12,198 1.81 112,335,834.29 2.72
14,001 to 15,000.................. 85,518 12.70 936,501,229.16 22.68
15,001 to 16,000.................. 1,728 0.26 25,540,316.52 0.62
16,001 to 17,000.................. 1,873 0.28 28,962,814.75 0.70
17,001 to 18,000.................. 1,927 0.29 31,477,178.17 0.76
18,001 to 19,000.................. 1,182 0.18 21,023,111.54 0.51
19,001 to 20,000.................. 4,925 0.73 90,895,557.76 2.20
20,001 to 21,000.................. 1,012 0.15 19,968,570.41 0.48
21,001 to 22,000.................. 1,093 0.16 22,540,162.81 0.55
22,001 to 23,000.................. 889 0.13 19,235,601.63 0.47
23,001 to 24,000.................. 829 0.12 18,721,273.61 0.45
24,001 to 25,000.................. 19,604 2.91 456,495,893.05 11.06
------- ------ ----------------- -------
Total......................... 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
38
<PAGE> 39
COMPOSITION OF VARIABLE RATE CREDIT LINES BY MARGIN
<TABLE>
<CAPTION>
CUT-OFF DATE NUMBER OF % OF PRINCIPAL % OF POOL BY
MARGIN CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
------------ ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
N/A(1)............................. 19,040 3.87% $ 117,785,922.94 4.23%
0.00% to 6.99%.................... 174 0.04 964,120.27 0.03
7.00% to 7.99%.................... 9,218 1.87 59,416,443.30 2.14
8.00% to 8.99%.................... 4,369 0.89 32,727,485.48 1.18
9.00% to 9.99%.................... 44,335 9.01 349,205,744.69 12.55
10.00% to 10.99%.................... 39,922 8.11 303,898,262.62 10.92
11.00% to 11.99%.................... 39,498 8.03 273,506,134.58 9.83
12.00% to 12.99%.................... 61,584 12.52 314,003,984.33 11.29
13.00% to 13.99%.................... 51,534 10.47 327,569,423.79 11.77
14.00% to 14.99%.................... 38,388 7.80 159,266,967.95 5.72
15.00% to 15.99%.................... 176,447 35.86 803,852,909.70 28.90
16.00% to 16.99%.................... 5,772 1.17 28,610,563.57 1.03
17.00% to 17.99%.................... 445 0.09 1,936,687.93 0.07
18.00% and above.................... 1,347 0.27 9,466,393.78 0.34
------- ------ ----------------- -------
Total.......................... 492,073 100.00% $2,782,213,044.93 100.00%
======= ====== ================= =======
</TABLE>
- -------------------------
(1) As part of the Subservicers' collection efforts, the Subservicers have
suspended interest accrual on these Credit Lines. Consequently, the margin
is "not applicable".
COMPOSITION OF CREDIT LINES BY TYPE OF LOAN RATE
<TABLE>
<CAPTION>
TYPE OF LOAN NUMBER OF % OF PRINCIPAL % OF POOL BY
RATE CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
------------ ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Variable............................ 492,073 73.09% $2,782,213,044.93 67.40%
Fixed............................... 181,170 26.91 1,345,594,084.48 32.60
------- ------ ----------------- -------
Total.......................... 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
39
<PAGE> 40
COMPOSITION OF CREDIT LINES BY CREDIT LIMIT UTILIZATION RATE
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
RANGES OF CREDIT LIMIT UTILIZATION RATE CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
- --------------------------------------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
0.00% to 4.99%..................... 57,878 8.60% $ 569,902.70 0.01%
5.00% to 9.99%..................... 4,069 0.60 2,455,682.15 0.06
10.00% to 14.99%..................... 4,492 0.67 4,576,247.30 0.11
15.00% to 19.99%..................... 5,227 0.78 7,329,616.73 0.18
20.00% to 24.99%..................... 6,018 0.89 10,880,249.07 0.26
25.00% to 29.99%..................... 7,731 1.15 17,050,175.73 0.41
30.00% to 34.99%..................... 12,905 1.92 34,564,103.74 0.84
35.00% to 39.99%..................... 13,534 2.01 41,936,966.85 1.02
40.00% to 44.99%..................... 14,967 2.22 47,673,301.24 1.15
45.00% to 49.99%..................... 11,704 1.74 48,550,073.93 1.18
50.00% to 54.99%..................... 13,710 2.04 60,907,735.89 1.48
55.00% to 59.99%..................... 16,054 2.38 71,499,540.17 1.73
60.00% to 64.99%..................... 18,271 2.71 85,744,524.79 2.08
65.00% to 69.99%..................... 16,866 2.51 95,090,635.59 2.30
70.00% to 74.99%..................... 18,149 2.70 108,564,124.39 2.63
75.00% to 79.99%..................... 21,153 3.14 135,827,533.14 3.29
80.00% to 84.99%..................... 30,093 4.47 195,339,282.09 4.73
85.00% to 89.99%..................... 35,220 5.23 228,448,378.79 5.53
90.00% to 94.99%..................... 48,892 7.26 379,593,069.79 9.20
95.00% to 99.99%..................... 144,294 21.44 1,371,202,025.60 33.21
100.00%................................ 137,004 20.35 765,981,848.68 18.56
100.01% to 104.99%(1).................. 24,665 3.66 326,720,205.36 7.92
105.00% to 109.99%(1).................. 9,591 1.42 82,390,608.45 2.00
110.00% and above(1)................... 756 0.11 4,911,297.24 0.12
------- ------ ----------------- -------
Total................................ 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
- -------------------------
(1) Within certain parameters established by the Subservicers from time to time,
on an exceptional basis, borrowers may exceed their Credit Limits by an
amount generally not in excess of $2,000 above their Credit Limit.
40
<PAGE> 41
COMPOSITION OF CREDIT LINES BY LOAN RATES(1)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOAN RATES CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
---------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
0.00(2)............................ 35,546 5.28% $ 221,507,378.95 5.37%
0.01% to 7.99%.................... 159 0.02 585,931.44 0.01
8.00% to 8.99%.................... 145 0.02 465,415.75 0.01
9.00% to 9.99%.................... 381 0.06 1,677,776.14 0.04
10.00% to 10.99%.................... 406 0.06 2,596,207.42 0.06
11.00% to 11.99%.................... 68 0.01 658,168.53 0.02
12.00% to 12.99%.................... 158 0.02 866,305.80 0.02
13.00% to 13.99%.................... 214 0.03 1,145,633.76 0.03
14.00% to 14.99%.................... 317 0.05 3,172,319.33 0.08
15.00% to 15.99%.................... 7,679 1.14 50,481,461.74 1.22
16.00% to 16.99%.................... 9,030 1.34 91,425,568.16 2.21
17.00% to 17.99%.................... 11,145 1.66 85,280,974.69 2.07
18.00% to 18.99%.................... 137,682 20.44 1,113,328,310.87 26.96
19.00% to 19.99%.................... 72,187 10.72 539,745,907.69 13.08
20.00% to 20.99%.................... 60,046 8.92 400,982,306.11 9.71
21.00% to 21.99%.................... 98,749 14.67 452,254,319.12 10.96
22.00% to 22.99%.................... 52,412 7.79 337,078,474.08 8.17
23.00% to 23.99%.................... 50,578 7.51 226,749,140.17 5.49
24.00% to 24.99%.................... 122,242 18.16 519,129,830.51 12.58
25.00% to 25.99%.................... 13,299 1.98 75,124,098.85 1.82
26.00% to 26.99%.................... 559 0.08 2,399,096.72 0.06
Over 27.00%......................... 241 0.04 1,152,503.58 0.03
------- ------ ----------------- -------
Total............................. 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
- -------------------------
(1) The Series 1997-2 Cut-Off Date Loan Rates for Credit Lines with an Index
Rate based on the prime rate are based on the prime rate as of September 1,
1997 which was 8.50%.
(2) As part of the Subservicers' collection efforts, the Subservicers have
suspended interest accrual on these Credit Lines.
41
<PAGE> 42
COMPOSITION OF CREDIT LINES BY AGE
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
AGE (IN MONTHS) CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
--------------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
0 to 5.......................... 110,692 16.43% $ 610,416,409.80 14.80%
6 to 11.......................... 54,596 8.11 464,493,398.64 11.25
12 to 17.......................... 82,454 12.25 549,489,858.37 13.31
18 to 23.......................... 78,392 11.64 488,417,401.51 11.83
24 to 29.......................... 42,318 6.29 274,099,858.37 6.64
30 to 35.......................... 68,882 10.23 385,313,564.62 9.33
36 to 41.......................... 57,985 8.61 341,535,327.34 8.27
42 to 47.......................... 29,055 4.32 169,254,702.52 4.10
48 to 53.......................... 25,720 3.82 145,513,923.27 3.53
54 to 59.......................... 13,591 2.02 81,061,548.73 1.96
60 to 65.......................... 10,521 1.56 59,872,462.90 1.45
66 to 71.......................... 8,190 1.22 45,278,159.03 1.10
72 to 77.......................... 8,996 1.34 51,146,723.08 1.24
78 to 83.......................... 11,966 1.78 61,072,600.55 1.48
84 to 89.......................... 16,181 2.40 88,697,346.56 2.15
90 to 95.......................... 14,050 2.09 79,975,154.05 1.94
96 to 101......................... 9,872 1.47 55,025,093.55 1.33
102 to 107........................ 5,801 0.86 31,147,087.85 0.75
108 to 113........................ 5,341 0.79 30,521,918.22 0.74
114 to 119........................ 6,435 0.96 38,363,028.41 0.93
Over 120 months................... 12,205 1.81 77,111,562.00 1.87
------- ------ ----------------- -------
Total........................... 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
COMPOSITION OF CREDIT LINES BY CONTRACTUAL DAYS DELINQUENT(1)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
DAYS DELINQUENT CREDIT LINES CREDIT LINES OUTSTANDING PRINCIPAL OUTSTANDING
--------------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
0 to 29........................ 592,391 87.99% $3,604,854,324.26 87.32%
30 to 59........................ 28,867 4.29 193,373,291.75 4.68
60 to 89........................ 12,183 1.81 78,640,515.98 1.91
90 to 119........................ 8,234 1.22 52,580,262.69 1.27
120 to 149........................ 6,553 0.97 40,181,662.13 0.97
150 to 179........................ 5,526 0.82 35,807,271.58 0.87
180 to 209........................ 4,896 0.73 31,609,029.47 0.77
210 to 239........................ 4,580 0.68 29,254,336.73 0.71
240 to 269........................ 4,514 0.67 28,389,854.34 0.69
270 to 299........................ 4,590 0.68 27,871,395.54 0.68
Over 299.......................... 909 0.14 5,245,184.94 0.13
------- ------ ----------------- -------
Total............................. 673,243 100.00% $4,127,807,129.41 100.00%
======= ====== ================= =======
</TABLE>
- -------------------------
(1) See the discussion on pages 31-32 as to the Subservicers' delinquency and
charge-off policies.
The Subservicers sold and assigned to the Seller, and the Seller sold and
assigned to the Deposit Trust, all right, title and interest in the balance of
the Initial Receivables as of the Initial Cut-Off Date. Subsequent to the
Initial Cut-Off Date, Additional Credit Lines have been designated to the
Deposit Trust and Receivables thereunder conveyed to the Deposit Trust. In
addition, from time to time, Aggregate Additional Credit Lines may be designated
to the Deposit Trust and the Cut-Off Date Balance of each such Credit Line and
Additional Balances generated under all Credit Lines during the life of the
Deposit Trust will be funded by the appropriate Subservicer and sold to the
Seller pursuant to the Receivables Purchase Agreement. Such Receivables will
then be transferred by the Seller to the Deposit Trust pursuant to the Pooling
and Servicing Agreement. Pursuant to the Pooling and Servicing Agreement, the
Servicer will have the responsibility to service the Credit Lines and will
42
<PAGE> 43
receive the monthly servicing fee. The Subservicers will perform the servicing
activities on behalf of HFC as described in "The HFC Revolving Consumer Credit
Lines -- Servicing of Revolving Consumer Credit Lines". See "Description of the
Deposit Trust -- Assignment of Receivables" and "-- Servicing Compensation and
Payment of Expenses" herein.
THE SERIES 1997-2 PARTICIPATION
GENERAL
The Series 1997-2 Participation constitutes an undivided beneficial
interest in the Receivables held in the Deposit Trust. Generally, the Series
1997-2 Participation will produce cash flows and incur defaults in the same
manner as if the Receivables were held directly by the Issuer, subject to the
distribution of excess spread to the Seller.
CONVEYANCE AND PERFORMANCE OF THE SERIES 1997-2 PARTICIPATION
The Seller will convey the Series 1997-2 Participation to the Issuer on the
Closing Date. Pursuant to the Series 1997-2 Supplement, the Issuer, as holder of
the Series 1997-2 Participation, shares on the basis of a specified percentage
of the Pool Balance in the cash flows on the Receivables held as assets of the
Deposit Trust. The Series 1997-2 Participation shall initially represent a
principal balance of $1,200,000,000 (the "Initial Series 1997-2 Participation
Invested Amount"). Thereafter, the "Series 1997-2 Participation Invested Amount"
with respect to any date will be an amount equal to the Initial Series 1997-2
Participation Invested Amount minus the sum of the Series 1997-2 Participation
Principal Distribution Amount paid for all Distribution Dates and the Defaulted
Amounts allocated to the Series 1997-2 Participation during the related and all
prior Collection Periods that have not been included in the Series 1997-2
Participation Principal Distribution Amount on the current or any prior
Distribution Date.
The Series 1997-2 Participation will be entitled to the applicable
percentage (the "Allocation Percentage") of the Interest Collections (which
shall include Recoveries), Principal Collections or Net Principal Collections
and Defaulted Amounts received or incurred during a Collection Period.
With respect to any Collection Period prior to the Early Amortization
Period, Interest Collections and Defaulted Amounts allocated to the Series
1997-2 Participation will be based upon the Floating Allocation Percentage (as
defined herein).
During an Early Amortization Period, Interest Collections will be allocated
to the Series 1997-2 Participation based upon the Fixed Allocation Percentage
(as defined herein). However, Defaulted Amounts allocated to the Series 1997-2
Participation with respect to any Collection Period during an Early Amortization
Period shall continue to be made based upon the Floating Allocation Percentage.
Interest Collections with respect to any Collection Period will be distributable
to the Issuer as holder of the Series 1997-2 Participation as described under
"Description of the Deposit Trust -- Distributions on the Series 1997-2
Participation". Allocated Interest Collections not so distributed will be
distributable to the Seller.
With respect to any Collection Period prior to the Accelerated Amortization
Date or the commencement of an Early Amortization Period, Principal Collections
will be allocated to the Series 1997-2 Participation based upon the greater of:
(i) the Floating Allocation Percentage of Net Principal Collections or (ii) the
Minimum Principal Amount. With respect to any Collection Period after the
Accelerated Amortization Date or during an Early Amortization Period, the Series
1997-2 Participation will be entitled to Principal Collections based upon the
Fixed Allocation Percentage.
"Net Principal Collections" will equal the excess, if any, of Principal
Collections for the related Collection Period, minus Additional Balances sold to
the Deposit Trust during the Collection Period. If there is no excess, Net
Principal Collections will equal zero.
On the Closing Date, the Issuer will pledge all of its interest in the
Series 1997-2 Participation to the Indenture Trustee for the benefit of the
Noteholders. The Indenture Trustee will have the right to enforce certain terms
of the Pooling and Servicing Agreement and the Series 1997-2 Supplement upon the
Issuer's failure to enforce such terms.
43
<PAGE> 44
MATURITY AND PREPAYMENT CONSIDERATIONS
The Indenture, except as otherwise described herein, provides that the
Noteholders of each Class will be entitled to receive on each Payment Date
distributions of Principal Collections, in the amounts described herein, until
the Security Balance of the Class is reduced to zero. All amounts distributable
as principal to Noteholders will be allocated to each class of Notes as
described under "Description of the Securities -- Distributions on the
Securities." Prior to the commencement of the Early Amortization Period,
Noteholders will receive, to the extent of the availability thereof, amounts
from Net Principal Collections based upon the Floating Allocation Percentage so
long as such amount is not less than the Minimum Principal Amount. Upon the
commencement of the Early Amortization Period or during any Collection Period
after the occurrence of the Accelerated Amortization Date, Noteholders will
receive amounts from Principal Collections based upon the Fixed Allocation
Percentage.
To the extent obligors make more draws than principal payments, the
Seller's Interest may increase. During the Early Amortization Period or after
the Accelerated Amortization Date, when the Series 1997-2 Participation's share
of Principal Collections is based upon the Fixed Allocation Percentage and does
not reflect any subsequent reductions in the Series 1997-2 Participation
Invested Amount, an increase in the Seller's Interest due to the funding of
Additional Balances and/or the addition of Aggregate Additional Credit Lines may
also result in the Series 1997-2 Participation receiving principal at a greater
rate. This is the case because (a) Principal Collections are not reinvested in
additional Receivables during the Early Amortization Period or after the
Accelerated Amortization Date, but instead are distributed on the Series 1997-2
Participation, and (b) the Series 1997-2 Participation is entitled to Principal
Collections based on the Fixed Allocation Percentage, which gives the Series
1997-2 Participation a greater share of Principal Collections each month.
The Pooling and Servicing Agreement permits the Seller, at its option, but
subject to the satisfaction of certain conditions specified in the Pooling and
Servicing Agreement, to remove certain Receivables from the Deposit Trust at any
time during the life of the Deposit Trust, so long as the Rating Agency
Condition is satisfied. Such removals may affect the rate at which principal is
distributed to Noteholders by reducing the overall Pool Balance and thus the
amount of Principal Collections. See "Description of the Deposit Trust --
Removal of Deposit Trust Assets."
As described herein, the actual maturity of each class of Notes will depend
in part on the availability and timing of the acquisition of the Additional
Balances and Aggregate Additional Credit Lines, the receipt of principal on the
Credit Lines and the extent of Defaulted Credit Lines. All of the Credit Lines
may be prepaid in full or in part at any time. The prepayment experience with
respect to the Credit Lines will affect the actual maturity of each class of
Notes.
HFC is not aware of any publicly generated studies or statistics available
on the rate of prepayment or additional draws with respect to revolving consumer
loans. Generally, consumer loans are not viewed by borrowers as permanent
financing. Accordingly, the Credit Lines may prepay prior to their respective
maturities. On the other hand, because most of the Credit Lines are not fully
amortizing, in the absence of voluntary borrower prepayments the Credit Lines
may experience minimal principal payment during their terms. The Deposit Trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing, as well as homeowner mobility, in the case of a Personal Homeowner
Credit Line.
In addition, the Deposit Trust's prepayment experience and the rate at
which the principal amount of each class of Notes amortizes will be affected by
any repurchases of Receivables by the Servicer or the Subservicers pursuant to
the Pooling and Servicing Agreement. Only the Personal Homeowner Credit Lines
contain due-on-sale provisions, and to the extent a Subservicer learns of a sale
of an interest in a property securing such a Credit Line, the applicable
Subservicer will generally attempt to open a new line of credit with such
borrower, which would be used to pay off the balance of the Personal Homeowner
Credit Line. In the event a new line is not established, the Subservicer will
enforce the due-on-sale provision unless such enforcement is not permitted by
applicable law. The enforcement of a due-on-sale provision will have the same
effect as a prepayment of the related Receivables. See "Description of the
Deposit Trust -- Collection and Other Servicing Procedures" and "Certain Legal
Aspects of the Credit Lines -- 'Due-on-Sale' Clauses" for a description of
certain provisions of the Pooling and Servicing Agreement referred to below that
may affect the prepayment experience on the Credit
44
<PAGE> 45
Lines. The yield to an investor in any Note who purchased such Note in the
secondary market at a price that is different from par will be different if the
rate of prepayment on the Credit Lines is actually different than the rate
anticipated by such investor at the time such Note was purchased.
Collections on the Credit Lines may vary because, among other things,
borrowers may make payments during any month as low as the Minimum Monthly
Payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon and, in addition,
borrowers may borrow additional amounts under their respective Credit Line
Agreements. It is possible that borrowers may fail to make Minimum Monthly
Payments. In addition, collections on the Credit Lines may also vary due to
seasonal purchasing and payment habits of borrowers. Any increase in the
interest rate charged on the Credit Lines due to a change in the Index Rate or a
rate increase may result in a greater level of prepayments and may result in
increased levels of delinquency and charge-offs.
No assurance can be given as to the level of prepayments that will be
experienced by the Deposit Trust and it can be expected that a portion of
borrowers will not prepay their Credit Lines to any significant degree.
Most of the Credit Lines will not mature prior to the maturity date of the
Notes. It has been HFC's experience and is expected to be the case that
borrowers will prepay the Receivables at a sufficient rate to retire the Notes
prior to their maturity date, but no assurance can be given in this respect.
The tables below set forth balances, payment windows and average lives
based on certain constant prepayment rates (which includes charge-offs) and
constant draw rates. Increases in constant prepayment rates will have the effect
of reducing average lives and payment windows, and speeding up reductions in
principal balances. Prior to an Accelerated Amortization Date or the occurrence
of an Amortization Event, draws will have the effect of reducing principal
payments to the Notes (but will not decrease payments below (i) for Distribution
Dates occurring prior to December 1998, 2.50% of the Series 1997-2 Participation
Invested Amount per month and (ii) for Distribution Dates occurring in December
1998 and thereafter, 2.20% of the Series 1997-2 Participation Invested Amount
per month). For Collection Periods after the Accelerated Amortization Date or
during an Early Amortization Period, draws will no longer have the effect of
reducing principal payments.
The following tables set forth below are based on a constant prepayment
rate (which includes charge-offs), constant draw rate (which for purposes of
these assumptions is the amount of Additional Balances on the Credit Lines drawn
each month expressed as an annualized percentage of the total principal of the
pool of Receivables outstanding at the beginning of such month), and optional
termination assumptions as indicated in the tables below. The following tables
assume that the Receivables have been aggregated into a pool with a principal
balance of $1,218,000,000, and that the Credit Lines have an interest rate of
18.50%, an annual gross charge-off rate of 7.50%, a 0% recovery rate and no
additional Credit Lines have been designated to the Deposit Trust. In addition,
such tables assume that (i) the distributions are made in accordance with the
description set forth under "Description of the Securities -- Distributions on
the Securities," (ii) distributions of principal and interest on the Notes will
be made on the 15th day of each calendar month regardless of the day on which
the Payment Date actually occurs, (iii) monthly payments on the Credit Lines are
comprised of interest only payments and the only principal payments on the
Credit Lines are those represented by prepayments calculated under each of the
prepayment assumptions as set forth in the tables below before giving effect to
draws and charge-offs, (iv) monthly draws are calculated under each of the
assumptions as set forth in the tables below before giving effect to prepayments
and charge-offs, (v) the scheduled due date for each of the Credit Lines is the
first day of each month, (vi) monthly charge-offs are calculated under each of
the assumptions set forth above before giving effect to prepayments and draws,
(vii) the closing date is November 19, 1997, and (viii) Interest Collections
allocated to the Series 1997-2 Participation are sufficient to pay interest on
the Notes and the Certificate Rate on the Certificates, Defaulted Amounts and
Accelerated Principal Payment Amounts on the Series 1997-2 Securities.
45
<PAGE> 46
PERCENTAGE OF ORIGINAL SECURITY BALANCE OF THE CLASS A-1 NOTES -- AMORTIZATION
SCHEDULE (1)(2)
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)
----------------------------------
PAYMENT DATE 20% 30% 40% 50%
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
The Closing Date........................... 100% 100% 100% 100%
November 1998.............................. 72 64 64 51
November 1999.............................. 51 41 41 28
November 2000.............................. 35 30 29 18
November 2001.............................. 28 23 23 11
November 2002.............................. 22 17 17 3
November 2003.............................. 18 11 7 0
November 2004.............................. 13 0 0 0
November 2005.............................. 6 0 0 0
November 2006.............................. 0 0 0 0
November 2007.............................. 0 0 0 0
November 2008.............................. 0 0 0 0
Weighted Average Life (yrs)(3)........... 2.95 2.35 2.30 1.57
</TABLE>
- -------------------------
(1) Assumes that (i) an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given and (ii) a
monthly constant draw rate of 1.95%.
(2) All percentages are rounded to the nearest 1%.
(3) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
WEIGHTED AVERAGE LIFE(1) AND PAYMENT WINDOW(2)
SENSITIVITY OF THE CLASS A-1 NOTES TO PAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)(3)
-------------------------------------------------------------------------------------------------
20% 30% 40% 50%
---------------------- --------------------- --------------------- ---------------------
MONTHLY CONSTANT DRAW RATE WAL WINDOW WAL WINDOW WAL WINDOW WAL WINDOW
-------------------------- ---------- -------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.00%......................... 2.95 yrs. 1 to 102 2.36 yrs. 1 to 83 1.80 yrs. 1 to 68 1.25 yrs. 1 to 48
1.95%......................... 2.95 yrs. 1 to 102 2.35 yrs. 1 to 82 2.30 yrs. 1 to 77 1.57 yrs. 1 to 61
3.00%......................... 2.95 yrs. 1 to 102 2.35 yrs. 1 to 82 2.30 yrs. 1 to 76 2.09 yrs. 1 to 71
4.00%......................... 2.95 yrs. 1 to 102 2.35 yrs. 1 to 82 2.30 yrs. 1 to 76 2.26 yrs. 1 to 72
</TABLE>
- -------------------------
(1) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
(2) The payment window is expressed in months and begins on the Payment Date in
which Noteholders first receive principal payments and ends on the Payment
Date in which the Security Balance of such Class of Notes is paid in full,
assuming the first Payment Date is December 15, 1997.
(3) Assumes that an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given.
46
<PAGE> 47
PERCENTAGE OF ORIGINAL SECURITY BALANCE OF THE CLASS A-2 NOTES -- AMORTIZATION
SCHEDULE (1)(2)
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)
PAYMENT DATE 20% 30% 40% 50%
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
The Closing Date........................... 100% 100% 100% 100%
November 1998.............................. 100 100 100 100
November 1999.............................. 100 100 100 100
November 2000.............................. 100 100 100 72
November 2001.............................. 100 91 91 46
November 2002.............................. 90 70 69 46
November 2003.............................. 71 46 45 0
November 2004.............................. 53 0 0 0
November 2005.............................. 47 0 0 0
November 2006.............................. 0 0 0 0
November 2007.............................. 0 0 0 0
November 2008.............................. 0 0 0 0
Weighted Average Life (yrs)(3)........... 7.12 5.76 5.51 3.98
</TABLE>
- -------------------------
(1) Assumes that (i) an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given and (ii) a
monthly constant draw rate of 1.95%.
(2) All percentages are rounded to the nearest 1%.
(3) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
WEIGHTED AVERAGE LIFE(1) AND PAYMENT WINDOW(2)
SENSITIVITY OF THE CLASS A-2 NOTES TO PAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)(3)
MONTHLY 20% 30% 40% 50%
CONSTANT DRAW ----------------------- ---------------------- ---------------------- ----------------------
RATE WAL WINDOW WAL WINDOW WAL WINDOW WAL WINDOW
------------- ---------- --------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.00%..................... 7.12 yrs. 55 to 102 5.80 yrs. 44 to 83 4.51 yrs. 32 to 68 3.14 yrs. 22 to 48
1.95%..................... 7.12 yrs. 55 to 102 5.76 yrs. 44 to 82 5.51 yrs. 44 to 77 3.98 yrs. 28 to 61
3.00%..................... 7.12 yrs. 55 to 102 5.76 yrs. 44 to 82 5.48 yrs. 44 to 76 5.00 yrs. 39 to 71
4.00%..................... 7.12 yrs. 55 to 102 5.76 yrs. 44 to 82 5.48 yrs. 44 to 76 5.30 yrs. 44 to 72
</TABLE>
- -------------------------
(1) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
(2) The payment window is expressed in months and begins on the Payment Date in
which Noteholders first receive principal payments and ends on the Payment
Date in which the Security Balance of such Class of Notes is paid in full,
assuming the first Payment Date is December 15, 1997.
(3) Assumes that an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given.
47
<PAGE> 48
PERCENTAGE OF ORIGINAL SECURITY BALANCE OF THE CLASS A-3 NOTES -- AMORTIZATION
SCHEDULE (1)(2)
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)
----------------------------------
PAYMENT DATE 20% 30% 40% 50%
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
The Closing Date........................... 100% 100% 100% 100%
November 1998.............................. 100 100 100 100
November 1999.............................. 100 100 100 77
November 2000.............................. 100 85 85 45
November 2001.............................. 78 57 57 33
November 2002.............................. 57 44 44 33
November 2003.............................. 45 33 33 0
November 2004.............................. 33 0 0 0
November 2005.............................. 33 0 0 0
November 2006.............................. 0 0 0 0
November 2007.............................. 0 0 0 0
November 2008.............................. 0 0 0 0
Weighted Average Life (yrs)(3)........... 5.99 4.83 4.67 3.29
</TABLE>
- -------------------------
(1) Assumes that (i) an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given and (ii) a
monthly constant draw rate of 1.95%.
(2) All percentages are rounded to the nearest 1%.
(3) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
WEIGHTED AVERAGE LIFE(1) AND PAYMENT WINDOW(2)
SENSITIVITY OF THE CLASS A-3 NOTES TO PAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CONSTANT PREPAYMENT RATE (% CPR)(3)
--------------------------------------------------------------------------------------------------
20% 30% 40% 50%
----------------------- ---------------------- ---------------------- ----------------------
MONTHLY CONSTANT DRAW RATE WAL WINDOW WAL WINDOW WAL WINDOW WAL WINDOW
-------------------------- ---------- --------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.00%........................ 5.99 yrs. 40 to 102 4.86 yrs. 32 to 83 3.73 yrs. 23 to 68 2.60 yrs. 16 to 48
1.95%........................ 5.99 yrs. 40 to 102 4.83 yrs. 32 to 82 4.67 yrs. 32 to 77 3.29 yrs. 20 to 61
3.00%........................ 5.99 yrs. 40 to 102 4.83 yrs. 32 to 82 4.65 yrs. 32 to 76 4.21 yrs. 28 to 71
4.00%........................ 5.99 yrs. 40 to 102 4.83 yrs. 32 to 82 4.65 yrs. 32 to 76 4.53 yrs. 32 to 72
</TABLE>
- -------------------------
(1) The weighted average life of each of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of years from
November 19, 1997 to the related Payment Date (on a 30/360 basis), (ii)
adding the results, and (iii) dividing by the sum of all principal payments
received since issuance.
(2) The payment window is expressed in months and begins on the Payment Date in
which Noteholders first receive principal payments and ends on the Payment
Date in which the Security Balance of such Class of Notes is paid in full,
assuming the first Payment Date is December 15, 1997.
(3) Assumes that an optional termination is exercised when the aggregate
Security Balance of the Notes and Certificates has been reduced to 10% or
less of the aggregate Security Balance of the Notes and Certificates as of
the Closing Date and the required 30 days notice has been given.
DESCRIPTION OF THE DEPOSIT TRUST
Household Consumer Loan Deposit Trust I (the "Deposit Trust") was
established pursuant to a Pooling and Servicing Agreement dated as of September
1, 1995 among The Chase Manhattan Bank, N.A. as deposit trustee, the Servicer
and the Seller. In July 1996, The Chase Manhattan Bank, N.A. merged into
Chemical Bank, a New York state chartered commercial bank. Following that
merger, The Chase Manhattan Bank, N.A. resigned as deposit trustee and the
Seller appointed Texas Commerce Bank National Association as successor deposit
trustee
48
<PAGE> 49
(the "Deposit Trustee"). The Deposit Trustee was originally an affiliate of
Chemical Bank, which merged into The Chase Manhattan Bank in 1996. An affiliate
of the Deposit Trustee is also acting as Owner Trustee.
The Deposit Trust operates as a master trust to acquire assets from the
Seller and to issue participation interests in the assets of the Deposit Trust
from time to time, such as the Series 1997-2 Participation and the Seller's
Interest. As of the date of this Prospectus, five Series Participation Interests
in the assets of the Deposit Trust have been issued, each of which supports
asset-backed securities. The Deposit Trust is expected to continue as a trust
after the Final Payment Date with respect to the Series 1997-2 Securities. The
assets of the Deposit Trust are expected to change over the life of the Deposit
Trust and the Series 1997-2 Securities, as certain interests and receivables in
revolving consumer credit lines and related assets are included in the Deposit
Trust and as certain interests and receivables subject to the Deposit Trust are
collected, charged-off or removed.
The Series 1997-2 Participation will be issued pursuant to the Pooling and
Servicing Agreement and a supplement thereto containing specific provisions
relating to the Series 1997-2 Participation (the "Series 1997-2 Supplement").
The Pooling and Servicing Agreement and a form of the Series 1997-2 Supplement
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions of the
Pooling and Servicing Agreement and the Series 1997-2 Supplement. The summaries
do not purport to be complete and are subject to and are qualified in their
entirety by reference to, all of the provisions of the Pooling and Servicing
Agreement and the Series 1997-2 Supplement, as applicable. Additionally,
capitalized terms used herein that are not defined herein shall have the
meanings ascribed to them in the Pooling and Servicing Agreement and the Series
1997-2 Supplement.
The Trust Assets include one share of preferred stock of the Seller (the
"Preferred Stock"). The Preferred Stock has a par value of $1.00 and is
designated the "Class SV Preferred Stock". On the Initial Issuance Date, the
Preferred Stock was issued directly to the Deposit Trustee. The share of
Preferred Stock held by the Deposit Trustee is the only issued and outstanding
share of the Seller's Preferred Stock. Pursuant to the Articles of Incorporation
of the Seller (incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus forms a part), the sole rights of the Deposit
Trustee as holder of the Preferred Stock are to (a) vote in the event the Seller
desires to institute proceedings to be adjudicated insolvent, consent to the
institution of any bankruptcy or insolvency case or petition, make an assignment
for the benefit of creditors, or admit in writing its inability to pay its debts
as they become due (collectively, the "Seller's Bankruptcy Initiatives"), and
(b) receive $1.00 upon liquidation of the Seller. The unanimous affirmative vote
of the holders of the Preferred Stock is required to approve any of the Seller's
Bankruptcy Initiatives. Holders of the Preferred Stock of the Seller have no
other rights, including the right to receive dividends or to vote on any other
matter.
Although a majority of the holders of Series Participation Interests is
required to direct the action of the Deposit Trustee with respect to any vote,
pursuant to the Issuer's pledge of its interest in the Series 1997-2
Participation, the Indenture Trustee has the authority to vote the interest of
the Series 1997-2 Participation. In the Indenture, the Indenture Trustee
covenants that it will not consent to any of the Seller's Bankruptcy
Initiatives. As trustee under indentures substantially identical to the
Indenture, the Indenture Trustee also holds the voting power with respect to
four of the five outstanding Series Participation Interests in the Deposit
Trust. Such indentures also obligate the Indenture Trustee to refuse to consent
to any of the Seller's Bankruptcy Initiatives. The fifth Series Participation
Interest is held by an institutional investor. As holder of a substantial
majority of the voting power with respect the Deposit Trust, the Indenture
Trustee effectively has the authority to vote to direct the Deposit Trustee with
respect to the Seller's Bankruptcy Initiatives.
GENERAL
The Series 1997-2 Participation will evidence a specified percentage
undivided beneficial interest in the Receivables held by the Deposit Trust and
collections thereon. The Receivables held by the Deposit Trust will consist of
the Receivables existing under the Initial Credit Lines as of the close of
business on the Initial Cut-Off Date and Additional Balances arising under such
Credit Lines thereafter. In addition, the Seller has conveyed and may convey
from time to time to the Deposit Trust, without recourse, its interest in all
Receivables existing in certain Aggregate Additional Credit Lines and Additional
Balances arising under such Credit Lines.
The balance in the Deposit Trust represented by the Series 1997-2
Participation on the Closing Date will equal $1,200,000,000 (the "Initial Series
1997-2 Participation Invested Amount"). Thereafter, the "Series 1997-2
49
<PAGE> 50
Participation Invested Amount" with respect to any date will be an amount equal
to the Initial Series 1997-2 Participation Invested Amount minus the sum of the
Series 1997-2 Participation Principal Distribution Amount paid for all
Distribution Dates and the Defaulted Amounts allocated to the Series 1997-2
Participation during the related and all prior Collection Periods that have not
been included in the Series 1997-2 Participation Principal Distribution Amount
on the current or any prior Distribution Date. The "Series 1997-2 Participation
Principal Distribution Amount" on a Distribution Date is equal to the sum of (a)
either (i) for Collection Periods occurring prior to the Accelerated
Amortization Date or the commencement of an Early Amortization Period an amount
equal to the greater of: (x) the Floating Allocation Percentage of Net Principal
Collections or (y) the Minimum Principal Amount, or (ii) the Fixed Allocation
Percentage of Principal Collections for Collection Periods occurring after the
Accelerated Amortization Date or during an Early Amortization Period, and (b) to
the extent of the applicable Allocation Percentage of Interest Collections
remaining after the distribution of the Participation Pass-Through Rate on the
Series 1997-2 Participation, the Defaulted Amounts allocated to the Series
1997-2 Participation during the related Collection Period and the amount of any
Defaulted Amounts previously allocated to the Series 1997-2 Participation that
have not been included in the Series 1997-1 Participation Principal Distribution
Amount on any prior Distribution Date. The Seller will own the entire remaining
undivided beneficial interest in the Receivables held by the Deposit Trust (the
"Seller's Interest") not represented by the Series 1997-2 Participation and any
other Series Participation Interests issued by the Deposit Trust.
ASSIGNMENT OF RECEIVABLES
On the Initial Issuance Date, Subservicers transferred to the Seller and
the Seller transferred to the Deposit Trust all of its right, title and interest
in (i) all Receivables under the Initial Credit Lines existing as of the Initial
Cut-Off Date, (ii) Additional Balances arising under such Credit Lines
thereafter, (iii) all Recoveries allocable to the Initial Credit Lines, and (iv)
the proceeds of all of the foregoing. The Seller has also sold and assigned to
the Deposit Trust and may hereafter sell and assign to the Deposit Trust from
time to time (a) Receivables arising under designated Aggregate Additional
Credit Lines (whether existing at the time the Credit Lines were designated or
arising under such Credit Lines thereafter), (b) all Recoveries allocable to
such Aggregate Additional Credit Lines, and (c) the proceeds of all of the
foregoing. The Deposit Trustee, concurrently with the transfer of the Initial
Receivables, delivered the Seller's Interest to the Seller. On each issuance
date for any Series, including the Closing Date, the Deposit Trustee will
authenticate and deliver one or more certificates representing a Series
Participation Interest, in each case against payment to the Seller of the net
proceeds of the sale of such Series Participation Interest. At the direction of
the Seller and the Issuer, the Deposit Trustee will deliver the Series 1997-2
Participation to the Indenture Trustee.
In connection with the transfer of Receivables to the Deposit Trust, each
Subservicer will indicate in its respective computer records that the
Receivables have been conveyed to the Seller and from the Seller to the Deposit
Trust. In addition, the Seller will provide to the Deposit Trustee a computer
file or a microfiche list from the Subservicers containing a true and complete
list showing for each Credit Line, as of the applicable date of designation (i)
its account number, (ii) the aggregate amount outstanding in such Credit Line
and (iii) the aggregate amount of Principal Receivables in such Credit Line. The
Subservicers will retain and will not deliver to the Deposit Trustee any other
records or agreements relating to the Credit Lines or the Receivables. Except as
set forth above, the records and agreements relating to the Credit Lines and the
Receivables will not be segregated from those relating to other consumer loans
and receivables, and the physical documentation relating to the Credit Lines or
Receivables will not be stamped or marked to reflect the transfer of Receivables
to the Seller or to the Deposit Trust. The Subservicers and the Seller have
filed and will file UCC financing statements with respect to the sale of the
Receivables from each of the Subservicers to the Seller and from the Seller to
the Deposit Trust, respectively, meeting the requirements of applicable state
law. See "Risk Factors" and "Certain Legal Aspects of the Receivables".
As described below under "-- Additions of Credit Lines", the Seller will
have the right (subject to certain limitations and conditions) to designate from
time to time New Credit Lines and Additional Credit Lines (together, the
"Aggregate Additional Credit Lines") to be included as Credit Lines. In the
event such a designation is made, the Subservicers will convey to the Seller
(for conveyance by the Seller to the Deposit Trust) all Receivables in such
Aggregate Additional Credit Lines, whether such receivables are then existing or
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thereafter created. Each such Aggregate Additional Credit Line must be an
Eligible Credit Line. In respect of any designation of Aggregate Additional
Credit Lines, the Seller will follow the procedures set forth in the preceding
paragraph, except the list provided to the Deposit Trustee will show information
concerning such Aggregate Additional Credit Lines as of the date such Aggregate
Additional Credit Lines are identified and designated. Aggregate Additional
Credit Lines will be selected by the respective Subservicer, in a manner which
it reasonably believes will not be materially adverse to the holders of
interests in the Deposit Trust. In addition, the Seller may (under certain
circumstances and subject to certain limitations and conditions) remove the
Receivables under certain Credit Lines as described under "Description of the
Deposit Trust -- Removal of Deposit Trust Assets".
REPRESENTATIONS AND WARRANTIES
In the Pooling and Servicing Agreement, the Seller makes representations
and warranties to the Deposit Trust relating to the Credit Lines and the
Receivables as of the closing date for each Series (and as of the date Aggregate
Additional Credit Lines are designated to the Deposit Trust) to the effect among
other things, that as of each applicable date of designation, (a) each Credit
Line was an Eligible Credit Line, (b) each of the Receivables then existing in
the Credit Lines was an Eligible Receivable and (c) thereafter, on the date of
creation of any new Receivable, such Receivable was an Eligible Receivable. If
the Seller breaches any representation and warranty described in this paragraph
and such breach remains uncured for 60 days after the earlier of the discovery
of such breach by the Seller or receipt of written notice of such breach by the
Seller and such breach has a material adverse effect on the holder of an
interest in such Receivable, all Receivables with respect to the Credit Line
affected ("Ineligible Receivables") will be reassigned to the Seller on the
terms and conditions set forth below. Each reassigned account shall no longer be
included as a Credit Line. The Deposit Trustee and the Servicer may agree to
extend the cure period for any such breach.
"Eligible Receivable" means each receivable (a) which has arisen under an
Eligible Credit Line (b) which was created in compliance in all material
respects with all requirements of law and pursuant to any agreement under which
such receivable was originated and which complies in all material respects with
all requirements of law applicable to the respective Subservicer or other
originator of the receivable, as applicable, (c) with respect to which all
material consents, licenses, approvals or authorizations of, or registrations or
declarations with, any governmental authority required to be obtained, effected
or given in connection with the creation of such receivable or the execution,
delivery, creation and performance by the applicable Subservicer, or by the
originator of the receivable, if not a Subservicer, of the related agreements
pursuant to which such receivable was created have been duly obtained or given
and are in full force and effect, (d) as to which at the time of its transfer to
the Deposit Trust, the Seller or the Deposit Trust will have good and marketable
title, free and clear of all liens, encumbrances, charges and security
interests, (e) which has been the subject of either a valid transfer and
assignment from the Seller to the Deposit Trust of all the Seller's right, title
and interest therein (and in the proceeds thereof), or the grant of a first
priority perfected security interest therein (and in the proceeds thereof),
effective until the termination of the Deposit Trust, (f) which at the time of
transfer to the Deposit Trust, will be the legal, valid and binding payment
obligation of the obligor thereof enforceable against such obligor in accordance
with its terms, subject to certain bankruptcy or insolvency related exceptions,
(g) which at the time of its transfer to the Deposit Trust, has not been waived
or modified except as permitted in accordance with the Servicing Guidelines, (h)
which is not at the time of its transfer to the Deposit Trust subject to any
right of rescission, set off, counterclaim or defense (including the defense of
usury), (i) as to which the applicable Subservicer or other originator of the
Receivable, as applicable, and the Seller have satisfied all obligations to be
fulfilled at the time it is transferred to the Deposit Trust, (j) as to which,
at the time of its transfer to the Deposit Trust, none of the applicable
Subservicer or such other originator of the receivable, as applicable, nor the
Seller has taken any action which would impair or failed to take any action the
result of which would impair the rights of the Deposit Trust or the holders of
interests therein and (k) which constitutes either an "account" or a "general
intangible" under the applicable UCC as then in effect.
An Ineligible Receivable shall be reassigned to the Seller on or before the
end of the Collection Period in which such reassignment obligation arises by the
Seller directing the Servicer to deduct the portion of such Ineligible
Receivable which is a Principal Receivable from the aggregate amount of the
Principal Receivables
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used to calculate the Seller's Trust Amount (as defined herein). In the event
that the exclusion of the principal portion of an Ineligible Receivable from the
calculation of the Seller's Trust Amount would cause the portion of the Seller's
Trust Amount owned by Household Consumer Loan Corporation to be reduced below
1.01% of the aggregate invested amounts of all outstanding Series Participation
Interests on the Distribution Date following the Collection Period in which such
reassignment obligation arises, the Seller will make a deposit into the
Collection Account in immediately available funds in an amount equal to the
amount by which the Seller's Trust Amount would be reduced below 1.01% of the
aggregate invested amounts of all outstanding Series Participation Interests.
The portion of such deposit attributable to the principal of such Ineligible
Receivable will be applied as a Principal Collection. The reassignment of any
Ineligible Receivable to the Seller, and the obligation of the Seller to make
any deposits into the Collection Account as described in this paragraph, is the
sole remedy available to the holders of Series Participation Interests or the
Deposit Trustee on behalf of holders of Series Participation Interests with
respect to any breach of the representations and warranties described in the
preceding paragraph. The Subservicers have each agreed with respect to
Receivables conveyed by such institution to repurchase from the Seller any
Ineligible Receivables reassigned to the Seller and to provide the Seller any
amounts necessary to enable the Seller to make the deposit referred to above.
The term "Seller's Trust Amount" means at any time of determination, an amount
equal to the total aggregate amount of Principal Receivables, minus the
aggregate invested amount of all outstanding Series Participation Interests in
the Deposit Trust (including the Series 1997-2 Participation) at such time.
The Seller will also make representations and warranties to the Deposit
Trust to the effect, among other things, that as of the Closing Date it is a
corporation validly existing under the laws of the State of Nevada, it has the
authority to consummate the transactions contemplated by the Pooling and
Servicing Agreement and the Series 1997-2 Supplement. The Seller will further
represent to the Deposit Trust on the Closing Date and, with respect to the
Aggregate Additional Credit Lines, as of each addition date, that (a) the
Pooling and Servicing Agreement and the Series 1997-2 Supplement constitutes a
valid, binding and enforceable agreement of the Seller and (b) the Pooling and
Servicing Agreement and the Series 1997-2 Supplement constitute either a valid
sale, transfer and assignment to the Deposit Trust of all right, title and
interest of the Seller in the Receivables, whether then existing or thereafter
created and the proceeds thereof (including proceeds in any of the accounts
established for the benefit of the holders of interests in the Deposit Trust),
and in Recoveries, or the grant of a first priority perfected security interest
under the applicable UCC in such Receivables and the proceeds thereof, which is
effective as to each receivable then existing on such date. In the event of a
material breach of any of the representations and warranties described in this
paragraph that has a material adverse effect on the interest of any holder of
any Series Participation Interest in the Receivables or the availability of the
proceeds thereof to the Deposit Trust (which determination will be made without
regard to whether funds are then available pursuant to any Series Enhancement),
either the Deposit Trustee, holders of Series Participation Interests entitled
to vote thereon evidencing not less than 51% of the principal portion of such
interests, or any other person entitled pursuant to a Series Supplement to
deliver such notice, by written notice to the Seller and the Servicer (and to
the Deposit Trustee if given by the holders of interests in the Deposit Trust or
any such other person), may direct the Seller to accept the reassignment of the
Receivables in the Deposit Trust within 60 days of such notice, or within such
longer period specified in such notice. The Seller will be obligated to accept
the reassignment of such Receivables on the Distribution Date following the
Collection Period in which such reassignment obligation arises. Such
reassignment will not be required to be made, however, if at the end of such
applicable period, the representations and warranties shall then be true and
correct in all material respects and any material adverse effect caused by such
breach shall have been cured. The price for such reassignment with respect to
the Series 1997-2 Participation will be equal to the unpaid principal balance of
the Series 1997-2 Participation on such Distribution Date on which the purchase
is scheduled to be made plus accrued and unpaid amounts at the Participation
Pass-Through Rate on the unpaid principal balance of the Series 1997-2
Participation and certain amounts that were distributable but not paid on a
prior Distribution Date at the Participation Pass-Through Rate, through the day
preceding such Distribution Date (the "Transfer Price"). The payment of the
Transfer Price in immediately available funds will be considered a payment in
full of the unpaid principal balance of the Series 1997-2 Participation and such
funds will be distributed upon presentation and surrender of the Series 1997-2
Participation. If the Deposit Trustee or holders of interests in the Deposit
Trust give a notice as provided above, the obligation of the Seller to make any
such deposit will constitute the sole remedy respecting a
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breach of the representations and warranties available to holders of interests
in the Deposit Trust or the Deposit Trustee on behalf of holders of interests in
the Deposit Trust. Under the Receivables Purchase Agreement, the applicable
Subservicer will repurchase the Receivables purchased by the Seller in
accordance with this paragraph.
It is not required or anticipated that the Deposit Trustee, the Owner
Trustee or the Indenture Trustee will make any initial or periodic examination
of the Receivables or any records relating to the Receivables for the purpose of
establishing the presence or absence of defects, compliance with the
Subservicers' and the Seller's representations and warranties or for any other
purpose. In addition, it is not anticipated or required that the Deposit
Trustee, the Owner Trustee or the Indenture Trustee will make any initial or
periodic general examination of the Servicer or Subservicers for the purpose of
establishing the compliance by the Servicer with its representations or
warranties or the performance by the Servicer of its obligations under the
Pooling and Servicing Agreement, the Series 1997-2 Supplement or for any other
purpose. The Servicer, however, will deliver to the Deposit Trustee on or before
March 31 of each calendar year an opinion of counsel with respect to the
validity of the interest of the Deposit Trust in and to the Receivables and
certain other components of the Deposit Trust.
TRANSFER OF SELLER'S INTEREST; ADDITIONAL SELLERS AND ORIGINATORS
The Pooling and Servicing Agreement allows the Seller to designate
affiliates of the Seller as additional sellers. Each such additional seller
would be a "Seller" under the Pooling and Servicing Agreement, and the term
"Seller" as used herein and therein would thereupon include such additional
seller, except that each person that is a Seller shall be severally and not
jointly, liable for all obligations, covenants, representations and warranties
specifically undertaken by such person in its capacity as a Seller. Such
additional seller would be transferred a "Supplemental Certificate",
representing a portion of the Seller's Interest subject to the following
conditions, among others: (a) the Rating Agency Condition shall have been
satisfied; and (b) the Seller shall have delivered to the Deposit Trustee a
certificate of any authorized officer to the effect that, in the reasonable
belief of the Seller, such transfer will not have an Adverse Effect.
Except for transfers to additional sellers as described above, as otherwise
set forth in the Pooling and Servicing Agreement, the Seller may not transfer
the Seller's Interest or its obligations under the Pooling and Servicing
Agreement and any Series Supplement, unless the Seller and the Deposit Trustee
have been advised that the Rating Agency Condition has been satisfied.
Upon satisfaction of the Rating Agency Condition and certification by the
Seller that it reasonably believes that no Adverse Effect will result, the
Seller is also permitted to acquire Receivables from originators other than the
Subservicers. Each such additional originator would sell Receivables to the
Seller pursuant to a receivables purchase agreement substantially similar to the
Receivables Purchase Agreement, which receivables purchase agreement would
subject such additional originator to the same obligations described herein to
which the Subservicers are subject, and references herein to the Subservicers in
their capacities as originators shall be deemed to include a reference to each
such additional originator.
ADDITIONS OF CREDIT LINES
The Seller will have the right, but not an obligation, to designate from
time to time Aggregate Additional Credit Lines to be included as Credit Lines in
order to avoid the occurrence of an Amortization Event. Should the Seller fail
to exercise this right, an Amortization Event may occur. In the event the Seller
does exercise such right, the applicable Subservicer will convey to the Seller,
which in turn will convey to the Deposit Trust, its interest in all receivables
arising from such Aggregate Additional Credit Lines, whether such Receivables
are then existing or thereafter created. Such conveyances will be subject to the
following conditions, among others: (i) each such Aggregate Additional Credit
Line must be an Eligible Credit Line, and (ii) except for the addition of New
Credit Lines (a) the Additional Credit Lines are selected in a manner which the
Seller reasonably believes will not result in an Adverse Effect; and (b) the
Rating Agency Condition shall have been satisfied. "Adverse Effect" means any
action that will result in the occurrence of an Amortization Event with respect
to any Series Participation Interest or adversely affect the amount or timing of
distributions to holders of any Series Participation Interest.
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Each Aggregate Additional Credit Line must be an Eligible Credit Line at
the time of its designation. However, since Aggregate Additional Credit Lines
which may be originated after the Closing Date may not have been a part of the
Portfolio as of the close of business on the Series 1997-2 Cut-Off Date, they
may not be of the same credit quality as the Credit Lines existing as of such
date. Such Aggregate Additional Credit Lines may have been originated using
credit criteria different from those which were applied to the Credit Lines as
of the Series 1997-2 Cut-Off Date or may have been acquired from another
consumer credit lender or entity which utilized different credit criteria.
Consequently, the performance of such Aggregate Additional Credit Lines may be
better or worse than the performance of the credit lines in the Portfolio as of
the Series 1997-2 Cut-Off Date.
REMOVAL OF DEPOSIT TRUST ASSETS
Subject to the conditions set forth in the following sentence, on any day
the Seller may, but shall not be obligated to, acquire all Receivables and
proceeds thereof with respect to Removed Credit Lines. The Seller is permitted
to designate and require reassignment to it of the Receivables from Removed
Credit Lines only upon satisfaction of the following conditions: (i) the Seller
shall have delivered to the Deposit Trustee a computer file or microfiche list
containing a true and complete list of all Removed Credit Lines, such Credit
Lines to be identified by, among other things, account number and their
aggregate amount of Principal Receivables; (ii) the Seller shall have delivered
an officer's certificate to the Deposit Trustee to the effect that in the
reasonable belief of the Seller: (a) no selection procedure reasonably believed
by the Seller to be materially adverse to the interests of holders of interests
in the Deposit Trust was utilized in removing the Removed Credit Lines; (b) such
removal will not result in the occurrence of an Amortization Event; and (c) such
removal will not have an Adverse Effect; (iii) the Seller shall have delivered
prior written notice (the "Removal Notice") of the removal to each Rating
Agency, the Deposit Trustee and the Servicer; and (iv) except with respect to a
removal of less than 5% of the Principal Receivables in the Deposit Trust, prior
to the date on which such Receivables are to be removed, the Rating Agency
Condition shall have been satisfied with respect to such removal.
Notwithstanding the foregoing, on the date a Credit Line becomes a
Defaulted Credit Line such Credit Line will be deemed removed from the Deposit
Trust and assigned to the Seller. All Recoveries attributable to such Credit
Lines will be deposited in the Collection Account and applied as Finance Charge
Receivables as provided herein.
In addition, the Servicer has the option to repurchase Receivables which
are delinquent prior to the date such Receivables would be charged-off. Such
repurchase will be accomplished by deducting the balance thereof from the
Seller's Trust Amount, provided that the portion of the Seller's Trust Amount
owned by Household Consumer Loan Corporation would not be reduced below 1.01% of
the aggregate invested amounts of all outstanding Series Participation
Interests.
DISCOUNT OPTION
The Pooling and Servicing Agreement provides that the Seller may at any
time designate, or redesignate a fixed percentage (the "Discount Percentage") of
the Principal Receivables assigned to the Deposit Trust to be treated as Finance
Charge and Administrative Receivables. The Principal Discount may apply to such
Principal Receivables assigned to the Deposit Trust prior to, on or after the
date the Seller makes such designation or redesignation. The Seller must provide
30 days' prior written notice to the Servicer, the Deposit Trustee, and each
Rating Agency of any increase, decrease or withdrawal of such designation or
redesignation, and such designation will become effective on the date specified
therein only if (i) an officer's certificate is delivered to the effect that in
the reasonable belief of the Seller such designation or redesignation will not
have an Adverse Effect and (ii) the Rating Agency Condition is satisfied. No
such election has been exercised as of the date of this Prospectus.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the applicable Subservicer may change the terms
of the Credit Line Agreements at any time. Upon a determination by a Subservicer
that prudent business practice requires such Subservicer to make changes in the
terms of the Credit Line Agreements as well as all comparable loans in its
respective
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portfolio, then, provided that such Subservicer and the Servicer reasonably
believe such changes will not have an Adverse Effect, such changes may be made.
PAYMENTS ON CREDIT LINES; DEPOSITS TO COLLECTION ACCOUNT
The Servicer has established and will maintain with the Deposit Trustee a
single separate trust account (the "Collection Account") for the benefit of the
holders of interests in the Deposit Trust, as their interests may appear. The
Collection Account will be an Eligible Account (as defined herein). Except as
otherwise described herein and subject to the investment provision described in
the following paragraphs, within two Business Days following receipt by the
Servicer or a Subservicer of amounts in respect of the Receivables (excluding
amounts representing taxes, assessments, credit insurance charges, or similar
items), the Servicer or Subservicer will deposit such amounts in the Collection
Account. Notwithstanding the foregoing, for as long as HFC remains the Servicer
under the Pooling and Servicing Agreement and maintains a commercial paper
rating of at least P-1 from Moody's Investors Service, Inc. ("Moody's") and A-1
from Standard & Poor's Ratings Services ("Standard & Poor's"), which is
currently the case, the Servicer need not deposit collections into the
Collection Account within two Business Days of receipt but may use for its own
benefit all such collections until the related Distribution Date. While such
ratings are maintained, on or prior to each Distribution Date, the Servicer will
deposit in the Collection Account amounts which are to be included in the funds
available for the related Distribution Date. Amounts deposited in the Collection
Account may be invested in Permitted Investments (as described in the Pooling
and Servicing Agreement) maturing no later than the related Distribution Date.
On the fourth Business Day prior to each Distribution Date, the Servicer will
notify the Deposit Trustee and the Indenture Trustee of the amount of such
deposit to be included in funds available for the related Distribution Date.
At any time that the commercial paper issued by HFC does not satisfy the
rating requirements specified above, HFC may continue to hold collections prior
to distribution as described above so long as HFC causes to be maintained an
irrevocable letter of credit or surety bond or other credit enhancement
instrument in form and substance satisfactory to each Rating Agency (a "Servicer
Credit Facility"), issued by a depository institution or insurance company
having a rating on its (A) short-term obligations of at least P-1 and long-term
obligations of at least A2 by Moody's and (B) short-term obligations of A-1 and
long-term obligations of A by Standard & Poor's or other ratings if approved by
the Rating Agencies and providing that the Deposit Trustee may draw thereon in
the event that HFC, as Servicer, fails to make any deposit or payment required
under the Pooling and Servicing Agreement.
An "Eligible Account" is an account that is either (i) a segregated account
with a depository institution organized under the laws of the United States or
any of the states thereof, which depository at the time of any deposit therein
has a long-term debt rating acceptable to the Rating Agencies or a certificate
of deposit rating acceptable to the Rating Agencies, or (ii) a segregated trust
account with the corporate trust department of a depository organized under the
laws of the United States or any one of the states thereof, and acting as a
trustee for funds deposited in such account, so long as any of the unsecured,
unguaranteed senior debt securities of such depository shall have a credit
rating signifying investment grade from the Rating Agencies.
Permitted Investments are specified in the Pooling and Servicing Agreement
and are limited to investments which meet the criteria of the Rating Agencies
from time to time as being consistent with their then-current ratings of the
Notes. Any earnings (net of losses and investment expenses) on funds in the
Collection Account will be paid to the Seller. The Servicer will have the
revocable power to withdraw funds from the Collection Account and to instruct
the Deposit Trustee to make withdrawals and payments from the Collection Account
for the purpose of carrying out its duties under the Pooling and Servicing
Agreement and the Series 1997-2 Supplement.
ALLOCATIONS AND COLLECTIONS
All collections on the Credit Lines will be allocated in accordance with
the Credit Line Agreements between amounts collected in respect of interest (the
"Interest Collections") and amounts collected in respect of principal, including
amounts constituting the principal portion of the amount paid to repurchase a
Receivable (the
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"Principal Collections"). However, notwithstanding the requirements of the
Credit Line Agreements, all Recoveries (whether interest or principal) shall be
treated as Interest Collections and not Principal Collections.
Prior to an Early Amortization Period, the portion of Interest Collections
allocable to the Series 1997-2 Participation will equal the Floating Allocation
Percentage of such Interest Collections. The remaining amount of Interest
Collections shall be allocated to the Seller's Interest or other Series
Participation Interests, as applicable. During an Early Amortization Period,
Interest Collections allocated to the Series 1997-2 Participation will equal the
Fixed Allocation Percentage of such Interest Collections. However, during an
Early Amortization Period, Defaulted Amounts allocated to the Series 1997-2
Participation shall continue to be made based upon the Floating Allocation
Percentage.
For any Collection Period prior to the Accelerated Amortization Date or the
commencement of an Early Amortization Period, Principal Collections will be
allocated to the Series 1997-2 Participation based upon the greater of: (i) the
Floating Allocation of Net Principal Collections or (ii) the Minimum Principal
Amount. For any Collection Period after the Accelerated Amortization Date or
during an Early Amortization Period, the Series 1997-2 Participation will be
entitled to Principal Collections based upon the Fixed Allocation Percentage. As
of any Determination Date, "Net Principal Collections" is the excess, if any, of
Principal Collections for the related Collection Period, less Additional
Balances sold to the Deposit Trust during such Collection Period.
As of any Determination Date, the "Floating Allocation Percentage" is
calculated as a fraction, the numerator of which is the Series 1997-2
Participation Invested Amount as of the last day of the related Collection
Period and the denominator of which is the greater of (a) the Pool Balance as of
the first day of the related Collection Period and (b) the sum of the numerators
used to calculate the Allocation Percentage of Finance Charge and Administrative
Receivables, Principal Receivables and Defaulted Amounts, as applicable, for all
outstanding Series Participation Interests for the related Distribution Date.
As of any Determination Date, the "Fixed Allocation Percentage" is
calculated as a fraction, the numerator of which is the Series 1997-2
Participation Invested Amount as of the last day immediately preceding the
commencement of an Early Amortization Period or the Accelerated Amortization
Date, as applicable, and the denominator of which is the greater of (a) the Pool
Balance as of the first day of the related Collection Period and (b) the sum of
the numerators used to calculate the Allocation Percentage of Finance Charges
and Administrative Receivables, Principal Receivables and Defaulted Amounts, as
applicable, for all outstanding Series Participation Interests for the related
Distribution Date.
For any Distribution Date, the Fixed Allocation Percentage applicable to
Principal Collections may be different than the Fixed Allocation Percentage
applicable to Interest Collections if an Amortization Event occurs after the
Accelerated Amortization Date.
"Recoveries" means amounts collected or received with respect to Defaulted
Credit Lines, net of costs and expenses of recovery.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Credit Lines as of such date. The "Principal
Balance" of a Credit Line (other than a Defaulted Credit Line) on any day is
equal to its Principal Balance on the respective Cut-Off Date, plus (i) any
Additional Balance in respect of such Credit Line, minus (ii) all Principal
Collections credited against the Principal Balance prior to such day, minus
(iii) all related Defaulted Amounts, and plus or minus (iv) any correcting
adjustments. The Principal Balance of a Defaulted Credit Line shall be zero.
With respect to any Distribution Date, a "Defaulted Amount" is the amount equal
to the Principal Balance of a Defaulted Credit Line that the Servicer has
charged off on its servicing records in the related Collection Period. A
"Defaulted Credit Line" is a Credit Line as to which the Servicer has charged
off all of the related Principal Balance.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called
for under the Credit Lines and will, consistent with the Pooling and Servicing
Agreement, follow such collection procedures as it follows from time to time
with respect to the consumer loans in its servicing portfolio which are
comparable to the Credit Lines. Consistent with the above, the Servicer may in
its discretion waive any late payment charge or any assumption or
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other fee or charge that may be collected in the ordinary course of servicing
the Credit Lines. The Servicer may also enter into a payment arrangement for
past due payments, provided that any such arrangement is consistent with the
Servicer's policies with respect to comparable consumer loans held in its
portfolio.
In accordance with the terms of the Pooling and Servicing Agreement, the
Servicer may consent under certain circumstances to the placing of a subsequent
senior lien in respect of a Personal Homeowner Credit Line. In any case in which
a property against which a lien was filed in connection with a Personal
Homeowner Credit Line is being conveyed by the borrower, the Servicer is not
obligated to exercise its rights to accelerate the maturity of such Credit Line
under any due-on-sale clause applicable thereto. To the extent the Servicer
becomes aware of such a conveyance, it will generally attempt to open a new
secured or unsecured line of credit with the borrower, thereby paying off the
balance of the Personal Homeowner Credit Line. In the event a new credit line is
not established, the Servicer will enforce the due-on-sale clause unless
prohibited by applicable law from doing so. See "Certain Legal Aspects of
Receivables -- 'Due-on-Sale' Clauses" herein.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As long as HFC is the Servicer it will receive, or be entitled to retain on
behalf of itself and the Subservicers, a portion of the Interest Collections
remaining after distribution of the Series 1997-2 Participation Interest
Distribution Amount and the Series 1997-2 Participation Principal Distribution
Amount as a servicing fee. Such fee attributable to the Series 1997-2
Participation will be paid monthly in arrears in the amount of 2.00% per annum
of the Series 1997-2 Participation Invested Amount as of the end of the related
Collection Period (the "Servicing Fee"). If HFC is no longer the Servicer, the
Servicing Fee will be paid to the successor Servicer from Interest Collections
prior to any distributions on the Series 1997-2 Participation.
The Servicer will pay certain ongoing expenses associated with the Deposit
Trust and incurred by it in connection with its responsibilities under the
Pooling and Servicing Agreement, including, without limitation, payment of the
fees and disbursements of the Deposit Trustee, and any Paying Agent. In
addition, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with defaulted Credit Lines, such right of
reimbursement being prior to the rights of holders of any Series Participation
Interests, including the Series 1997-2 Participation, to receive any related
Recoveries.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides for delivery on or before
March 31 in each year, to the Deposit Trustee, the Owner Trustee, the Indenture
Trustee and the Rating Agencies of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its material
obligations under the Pooling and Servicing Agreement throughout the preceding
calendar year, except as specified in such statement.
On or before March 31 of each year, the Servicer will furnish a report
prepared by a firm of independent public accountants to the Deposit Trustee, the
Owner Trustee, the Indenture Trustee and the Rating Agencies stating that such
accountants have examined certain documents and the records relating to
servicing of credit lines as prescribed under certain agreements (including the
Pooling and Servicing Agreement) and compared mathematical calculations for each
monthly servicing report with the Servicer's computer reports. Such report will
state whether such examinations disclosed items of non-compliance with the
provision of the Pooling and Servicing Agreement or variations in the results of
such calculations which, in the opinion of the firm, are material, and all items
of non-compliance shall be specified in the report.
CERTAIN MATTERS REGARDING THE SERVICER AND THE SELLER
The Pooling and Servicing Agreement provides that the Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has delivered an executed assumption agreement in form satisfactory to
the Deposit Trustee, assigning its obligations and duties to a wholly owned
subsidiary of Household International, Inc. or to another entity as to which the
Rating Agency Condition shall have been satisfied; and (b) the successor meets
the
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eligibility requirements specified in the Pooling and Servicing Agreement. No
such resignation will become effective until the Deposit Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Pooling and
Servicing Agreement.
The Servicer may perform any of its duties and obligations under the
Pooling and Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Servicer. Notwithstanding any such arrangement,
the Servicer will remain liable and obligated to the Deposit Trustee, the
Indenture Trustee, and the holders of interests in the Deposit Trust for the
Servicer's duties and obligations under the Pooling and Servicing Agreement,
without any diminution of such duties and obligations and as if the Servicer
itself were performing such duties and obligations.
The Pooling and Servicing Agreement provides that neither the Servicer, the
Seller, nor any director, officer, employee or agent of the Servicer or the
Seller will be under any liability to the Deposit Trust, the Indenture Trustee
or the holders of any Series Participation Interest and any Noteholders or
Certificateholders (together, "Securityholders") for any action taken or for
refraining from the taking of any action in good faith pursuant to the Pooling
and Servicing Agreement, or for errors in judgment; provided, however, that
neither the Servicer, the Seller nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. The Pooling and
Servicing Agreement further provides that the Servicer, the Seller and any
director, officer, employee or agent of the Servicer or the Seller is entitled
to indemnification by the Deposit Trust and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Pooling and Servicing Agreement or any interest in the Deposit Trust,
other than any loss, liability or expense related to any specific Credit Line
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Pooling and Servicing Agreement) and any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement provides that neither the Servicer nor the Seller will be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective duties under the Pooling and Servicing Agreement
and which in its opinion may involve it in any expense or liability. The
Servicer or the Seller may, however, in its or their discretion undertake any
such action which it or they may deem necessary or desirable with respect to the
Pooling and Servicing Agreement and the rights and duties of the parties thereto
and the interests of the holders of interest thereunder. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
and any claims by the Servicer or the Seller for indemnification will be
expenses, costs and liabilities of the Deposit Trust. The Servicer or the
Seller, as the case may be, will be entitled to be reimbursed therefor and
indemnified pursuant to the terms of the Pooling and Servicing Agreement out of
funds otherwise distributable to holders of interests in the Deposit Trust. The
Servicer's right to such indemnity or reimbursement shall survive any
resignation or termination of the Servicer with respect to any losses, expenses,
costs or liabilities arising prior to such resignation or termination (or
arising from events that occurred prior to such resignation or termination).
Any corporation into which the Servicer or the Seller may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer or the Seller shall be a party, or any
corporation succeeding to the business of the Servicer or the Seller shall be
the successor of the Servicer or the Seller under the Pooling and Servicing
Agreement.
SERVICER DEFAULTS
"Servicer Defaults" will consist of: (i) any failure by the Servicer to
deposit in the Collection Account any deposit, or to give instructions to the
Deposit Trustee to make a payment, transfer or deposit required to be made under
the Pooling and Servicing Agreement which failure continues unremedied for five
Business Days after the date such payment, transfer or deposit was required to
be made or given; (ii) any failure by the Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which has an Adverse Effect and continues unremedied for 60
days after the giving of written notice of such failure to the Servicer by the
Deposit Trustee, or to the Servicer and the Deposit Trustee by holders of
interests in the Deposit Trust evidencing not less than 10% of the then
outstanding principal amount of each such affected interest; (iii) any breach of
a representation or warranty or untrue certification by the Servicer which has
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an Adverse Effect and continues unremedied for 60 days after the giving of
written notice of such failure to the Servicer by the Deposit Trustee, or to the
Servicer and the Deposit Trustee by holders of interests in the Deposit Trust
evidencing not less than 10% of the then outstanding principal amount of each
such affected interest; or (iv) the occurrence of certain events of bankruptcy,
insolvency or receivership relating to the Servicer as set forth in the Pooling
and Servicing Agreement which continue unremedied for 60 days.
A delay in or failure of performance referred to under clauses (ii) or
(iii) above that continues for a period of 60 days after the applicable grace
period shall not constitute a Servicer Default if such delay or failure could
not be prevented by the exercise of reasonable diligence by the Servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any such event the Servicer shall not be relieved from
using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the Pooling and Servicing Agreement and the
Servicer shall provide the Deposit Trustee, the Seller, and the holders of
interests in the Deposit Trust prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON A SERVICER DEFAULT
So long as a Servicer Default remains unremedied, either (a) the Deposit
Trustee or (b) the holders of Series Participation Interests in the Deposit
Trust evidencing more than 50% of the then aggregate outstanding principal
amount of each such interest may terminate all of the rights and obligations of
the Servicer under the Pooling and Servicing Agreement and in and to the Credit
Lines. If the Servicer's rights are terminated, a successor Servicer, appointed
by the Deposit Trustee, or if no successor has been appointed by the date the
Servicer's rights and obligations are terminated, the Deposit Trustee, will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to similar compensation arrangements.
In addition, if the Deposit Trustee has not received any bids from potential
successor Servicers within 60 days of the date notice of termination has been
delivered to the Servicer and the Servicer Default cannot be cured, the Seller
shall have the right, but not an obligation, to repurchase the outstanding
Series Participation Interests on the following Distribution Date for an amount
equal to the Transfer Price. In the event that the Deposit Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of a
consumer loan servicer holding all licenses and permits required to perform the
obligations of the Servicer under the Pooling and Servicing Agreement. Any such
successor must have a net worth of at least $50,000,000 and be reasonably
acceptable to the Rating Agencies. Pending such appointment, the Deposit Trustee
will be obligated to act in the capacity as Servicer unless prohibited by law.
Any successor will receive the same compensation that the prior Servicer would
otherwise have received (or such lesser compensation as the Deposit Trustee and
such successor may agree). A receiver or conservator for the Servicer may be
empowered to prevent the termination and replacement of the Servicer where the
only Servicer Default that has occurred relates to the bankruptcy or insolvency
of the Servicer.
Holders of Series Participation Interests in the Deposit Trust will have no
right under the Pooling and Servicing Agreement to direct the time, method and
place of exercising any remedy, trust or power of the Deposit Trustee unless
holders evidencing more than 50% of the then aggregate outstanding principal
amount of Series Participation Interests make written request upon the Deposit
Trustee to take such action. However, under certain circumstances described in
the Pooling and Servicing Agreement, upon the advice of counsel, the Deposit
Trustee may refuse to take such action. The Deposit Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the Pooling
and Servicing Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Series Participation Interests in the Deposit Trust, unless such holders have
offered to the Deposit Trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
Other than as described in the following paragraph, the Pooling and
Servicing Agreement and any supplement thereto may be amended by the Seller, the
Servicer and the Deposit Trustee, without consent of the holders of the Series
1997-2 Participation, any other Series Participation Interest or the Series
1997-2 Securities
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provided that the Seller certifies to the Deposit Trustee and the Rating
Agencies that it does not believe such amendment will have an Adverse Effect.
The Pooling and Servicing Agreement or any supplement thereto may be
amended by the Seller, the Servicer and the Deposit Trustee with the consent of
the holders of Series Participation Interests evidencing not less than 66 2/3%
of the aggregate unpaid principal amount of the Series Participation Interests
of all affected Series for which the Seller has not delivered an officer's
certificate stating that there is no Adverse Effect. However, no such amendment
may (a) without the consent of each holder of a Series Participation Interest
effected (i) reduce in any manner the amount of, or delay the timing of,
deposits or distributions on any Series Participation Interest, (ii) change the
definition or the manner of calculating the interest of any Series Participation
Interest or (iii) reduce the aforesaid percentage of the aggregate unpaid
principal amount of the Series Participation Interests the holders of which are
required to consent to any amendment, or (b) adversely affect the rating of any
Series or class of securities without the consent of the holders of Series
Participation Interests evidencing not less than 66 2/3% of the aggregate unpaid
principal amount of the Series Participation Interests affected thereby.
Promptly following the execution of any amendment to the Pooling and Servicing
Agreement that did not require the consent of any holders of Series
Participation Interests, the Deposit Trustee will furnish written notice of the
substance of such amendment to holders of Series Participation Interests.
Notwithstanding the foregoing, any supplement executed in connection with the
issuance of one or more subsequent Series will not be considered an amendment to
the Pooling and Servicing Agreement. Any designation of additional Sellers in
accordance with the terms of the Pooling and Servicing Agreement will also not
be considered an amendment of the Pooling and Servicing Agreement unless the
supplement designating such additional Seller expressly amends the Pooling and
Servicing Agreement.
EXERCISE OF RIGHTS BY HOLDERS OF SERIES PARTICIPATION INTERESTS
The Series 1997-2 Participation will be the fifth Series Participation
Interest issued by the Deposit Trust. It is anticipated that additional Series
Participation Interests will be issued and will be the basis for the issuance of
additional series of securities. The rights of such holders to direct the voting
of the related Series Participation Interest will be governed by the documents
pursuant to which such additional series are issued and may be different from
such provisions relating to the Series 1997-2 Participation. It is not expected
that holders of the Series 1997-2 Securities will hold voting power sufficient
to unilaterally direct any action with respect to the Deposit Trust. As
additional Series Participation Interests are issued and the Series 1997-2
Participation is reduced, the relative interest of the Series 1997-2 Securities
in the Deposit Trust will be reduced, thereby further reducing the effective
voting power of such securities.
THE DEPOSIT TRUSTEE
The commercial bank or trust company serving as Deposit Trustee may have
other banking relationships with the Seller and/or its affiliates, including the
Servicer.
The Deposit Trustee may resign at any time, in which event the Seller will
be obligated to appoint a successor Deposit Trustee. The Seller may also remove
the Deposit Trustee if the Deposit Trustee ceases to be eligible to continue as
such under the Pooling and Servicing Agreement or if the Deposit Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Seller will be
obligated to appoint a successor Deposit Trustee. Any resignation or removal of
the Deposit Trustee and appointment of a successor Deposit Trustee will not
become effective until acceptance of the appointment by the successor Deposit
Trustee.
CERTAIN ACTIVITIES
The Deposit Trust will not: (i) borrow money; (ii) make loans; (iii) invest
in securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Pooling and Servicing Agreement, engage in the
purchase and sale (or turnover) of investments; (vi) offer securities or other
interests in exchange for property (except Series Participation Interests); or
(vii) repurchase or otherwise reacquire its securities. See "Description of the
Deposit Trust -- Evidence as to Compliance" for information regarding reports as
to the compliance by the Servicer with the terms of the Pooling and Servicing
Agreement.
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DISTRIBUTIONS ON THE SERIES 1997-2 PARTICIPATION
On each Distribution Date, distributions on the Series 1997-2 Participation
will be made by the Deposit Trustee or the Paying Agent to the Indenture
Trustee. The term "Distribution Date" means the Business Day prior to the
Payment Date in each month. Distributions will be made by wire transfer to the
Payment Account maintained by the Indenture Trustee.
Interest Distributions. On each Distribution Date, the Deposit Trustee or
the Paying Agent will distribute to the Indenture Trustee from the applicable
Allocation Percentage of Interest Collections for the preceding Collection
Period an amount equal to the amount accrued at the Participation Pass-Through
Rate on the unpaid Principal Balance of the Series 1997-2 Participation,
calculated on the basis of the actual number of days elapsed, from and
including, the preceding Distribution Date (or in the case of the first
Distribution Date, the Closing Date), to but excluding, the current Distribution
Date and a 360 day year. The "Participation Pass-Through Rate" for each
Distribution Date is a per annum rate equal to the Prime Rate as published by
the Board of Governors of the Federal Reserve System in Statistical Release
H.15(519), Selected Interest Rates, or any successor publication ("Prime Rate")
as of the first day of the related Interest Period, less 1.50%, subject to a
minimum rate equal to a per annum rate which will result in an amount which will
be sufficient to pay the full amount of interest due on the Notes and to make a
full distribution on the Certificates at the Certificate Rate, plus, in respect
of the Accelerated Principal Payment Amount, for Distribution Dates occurring
prior to December 1998, 1.50% of the Series 1997-2 Participation Invested
Amount, and for Distribution Dates occurring in December 1998 and thereafter,
0.25% of the Series 1997-2 Participation Invested Amount, in each case, on the
basis of twelve months consisting of 30 days each and a 360 day year. See
"Description of the Securities -- Distributions on the Securities" herein.
Principal Distributions. On each Distribution Date, the Deposit Trustee or
the Paying Agent will distribute to the Indenture Trustee on behalf of the
Issuer, the Floating or Fixed Allocation Percentage (as applicable) of Principal
Collections or Net Principal Collections (as applicable); provided that prior to
an Early Amortization Period or the Accelerated Amortization Date, if the
Floating Allocation Percentage of Net Principal Collections is less than the
Minimum Principal Amount, the amount of Principal Collections distributable on
the Series 1997-2 Participation shall be the Minimum Principal Amount.
The "Minimum Principal Amount" for any Distribution Date prior to the
Accelerated Amortization Date and the occurrence of an Amortization Event is the
lesser of (a) the Floating Allocation Percentage of Principal Collections for
such Distribution Date and (b) the amount by which (i) for Distribution Dates
occurring prior to December 1998, 2.50% of the Series 1997-2 Participation
Invested Amount, and (ii) for Distribution Dates occurring in December 1998 and
thereafter, 2.20% of the Series 1997-2 Participation Invested Amount, in each
case, exceeds the portion of the amount of the Defaulted Amount allocated to the
Series 1997-2 Participation that is covered by the applicable Allocation
Percentage of Finance Charges and Administrative Receivables in excess of the
Series 1997-2 Participation Interest Distribution Amount distributed on the
Series 1997-2 Participation on such Distribution Date.
DESCRIPTION OF THE SECURITIES
The Notes will be issued pursuant to the Indenture. The Certificates will
be issued pursuant to the Trust Agreement. Forms of the Indenture and Trust
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
of the Indenture and Trust Agreement. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture and Trust Agreement.
GENERAL
The Notes will be issued only in fully registered form, in denominations of
$100,000 and integral multiples of $1,000 in excess thereof. The Notes will be
secured by the Trust Assets pledged by the Issuer to the Indenture Trustee
pursuant to the Indenture which will consist of: (i) the Series 1997-2
Participation (ii) collections in respect of the Series 1997-2 Participation;
(iii) amounts on deposit in the Payment Account (excluding net
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earnings thereon); (iv) the Preferred Stock of the Seller and (v) an assignment
of the Issuer's rights under the Series 1997-2 Supplement. Replacement Notes, if
issued, will be transferable and exchangeable at the corporate trust office of
the Indenture Trustee, which will initially act as Note Registrar. See
"Registration of Notes" below. No service charge will be made for any
registration, exchange or transfer of Notes, but the Indenture Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Application will be made to list the Notes on the Luxembourg Stock
Exchange.
DISTRIBUTIONS ON THE SECURITIES
Beginning with the Payment Date occurring in December 1997, distributions
on the Notes will be made by the Indenture Trustee or the Paying Agent on each
Payment Date to the persons in whose names such Notes are registered
("Noteholders") at the close of business on the day prior to each Payment Date
(the "Record Date"), except as provided in "Registration of Notes" below. The
term "Payment Date" means the fifteenth day of each month (or if such day is not
a Business Day, the next succeeding Business Day). Distributions will be made by
check or money order mailed (or upon the request of a Noteholder owning Notes
having denominations aggregating at least $5,000,000, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case of
book-entry certificates, will be DTC or its nominee) as it appears on the Note
Register in amounts calculated as described herein on the fifth Business Day
prior to the related Payment Date (the "Determination Date"). However, the final
distribution in respect of the Notes will be made only upon presentation and
surrender thereof at the office or the agency of the Indenture Trustee specified
in the notice to Noteholders of such final distribution. A "Business Day" is any
day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the States of New York or Illinois are required or authorized by
law to be closed.
Allocation of Remittances on the Series 1997-2 Participation. The Indenture
Trustee will establish and maintain an account (the "Payment Account") into
which the Deposit Trustee will wire the remittances on the Series 1997-2
Participation for the related Collection Period. Each Distribution Date with
respect to the Series 1997-2 Participation will be the Business Day prior to
each Payment Date on the Series 1997-2 Securities. The Payment Account will be
an Eligible Account. Amounts on deposit in the Payment Account will be invested
in certain investments acceptable to the Rating Agencies maturing on or before
the related Payment Date.
Except as provided below, on each Payment Date other than a Payment Date
occurring after an Event of Default, remittances on the Series 1997-2
Participation will be allocated in the following order of priority:
(i) sequentially, as payment for the amount of interest due on the Class
A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class B Notes;
(ii) except as otherwise specified below, to the Certificates on behalf of
the Issuer, as payment of the amount distributable in respect of the
Certificate Rate on the Security Balance of the Certificates and previously
unpaid;
(iii) sequentially, up to the Optimum Monthly Principal,
(a) to the Class A-1 Notes until the Security Balance of the Class A-1
Notes equals the Class A-1 Targeted Principal Balance,
(b) to the Class A-2 Notes until the Security Balance of the Class A-2
Notes equals the Class A-2 Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class A-2 Notes is not reduced below
the Minimum Security Balance for the Class A-2 Notes,
(c) to the Class A-3 Notes until the Security Balance of the Class A-3
Notes equals the Class A-3 Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class A-3 Notes is not reduced below
the Minimum Security Balance for the Class A-3 Notes, and
(d) to the Class B Notes until the Security Balance of the Class B Notes
equals the Class B Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class B Notes is not reduced below the
Minimum Security Balance for the Class B Notes;
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(iv) to the Certificates, up to the remaining Optimum Monthly Principal
until the Security Balance of the Certificates equals the Certificate
Targeted Balance, to the extent the Adjusted Security Balance of the
Certificates is not reduced below $14,000,000;
(v) to the Seller, in reduction of the Overcollateralization Amount, up to
the remaining Optimum Monthly Principal provided the Overcollateralization
Amount is not less than $17,000,000;
(vi) as principal on the Notes, sequentially, up to the Accelerated
Principal Payment Amount for such Payment Date:
(a) to the Class A-1 Notes until the Security Balance of the Class A-1
Notes equals the Class A-1 Targeted Principal Balance,
(b) to the Class A-2 Notes until the Security Balance of the Class A-2
Notes equals the Class A-2 Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class A-2 Notes is not reduced below
the Minimum Security Balance for the Class A-2 Notes,
(c) to the Class A-3 Notes until the Security Balance of the Class A-3
Notes equals the Class A-3 Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class A-3 Notes is not reduced below
the Minimum Security Balance for the Class A-3 Notes,
(d) to the Class B Notes until the Security Balance of the Class B Notes
equals the Class B Targeted Principal Balance, to the extent the
Adjusted Security Balance of the Class B Notes is not reduced below the
Minimum Security Balance for the Class B Notes,
(e) to the Class A-1 Notes until the Security Balance of the Class A-1
Notes equals zero,
(f) to the Class A-2 Notes until the Security Balance of the Class A-2
Notes equals zero,
(g) to the Class A-3 Notes until the Security Balance of the Class A-3
Notes equals zero, and
(h) to the Class B Notes until the Security Balance of the Class B Notes
equals zero;
(vii) as principal on the Notes, sequentially, up to the remaining Optimum
Monthly Principal for such Payment Date;
(a) to the Class A-1 Notes until the Security Balance of the Class A-1
Notes equals zero,
(b) to the Class A-2 Notes until the Security Balance of the Class A-2
Notes equals zero,
(c) to the Class A-3 Notes until the Security Balance of the Class A-3
Notes equals zero, and
(d) to the Class B Notes until the Security Balance of the Class B Notes
equals zero;
(viii) to the Certificates, up to the remaining Optimum Monthly Principal
until the Security Balance of the Certificates equals the Certificate
Minimum Balance, or if the Series 1997-1 Participation Invested Amount is
zero, then to the Certificates until the Security Balance of the
Certificates equals zero;
(ix) to the Seller in reduction of the Overcollateralization Amount to an
amount not less than zero, the remaining Optimum Monthly Principal; and
(x) any remaining amounts to the Issuer or its designee.
In the event (a) immediately prior to a Distribution Date the Series 1997-2
Participation Invested Amount is less than the aggregate Security Balance of the
Class A and Class B Notes immediately prior to the related Payment Date, or (b)
the remittances on the Series 1997-2 Participation for a Payment Date is less
than the aggregate amount to be paid pursuant to clauses (i) and (ii) above, the
amount to be paid pursuant to clause (ii) above will be paid only after payments
are made on the Notes pursuant to clause (iii).
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The defined terms used in this description of Allocation of Remittances on
the Series 1997-2 Participation are defined as follows:
For each Payment Date, the "Accelerated Principal Payment Amount" is equal
to the lesser of (i) the amount by which the remittance on the Series 1997-2
Participation exceeds the sum of (a) the amount to be distributed on the Notes
with respect to interest and the Certificates in respect of the Certificate Rate
on such Payment Date and (b) the Optimum Monthly Principal for such Payment Date
and (ii) one-twelfth of the Series 1997-2 Participation Invested Amount,
multiplied, for each Payment Date occurring prior to December 1998, by 1.50%,
and for each Payment Date occurring in December 1998 or thereafter, by 0.25%.
With respect to any Payment Date, the "Adjusted Security Balance" of a
Class of Notes or of the Certificates shall equal the related Security Balance
on the Closing Date after giving effect to distributions thereon in respect of
principal on all Payment Dates (including the current Payment Date), less any
Net Charge-Off allocated to such security on such Payment Date.
With respect to any Payment Date, the "Certificate Minimum Balance" shall
equal the Series 1997-2 Participation Invested Amount after giving effect to the
distribution made on the Series 1997-2 Participation on such Payment Date,
multiplied by 1.0101%.
With respect to any Payment Date, the "Certificate Targeted Balance" shall
equal (i) the Series 1997-2 Participation Invested Amount, multiplied by 91.5%,
less (ii) the Adjusted Security Balance of each Class of Notes immediately prior
to such Payment Date and after giving effect to payments of principal on the
Class A Notes and Class B Notes pursuant to clause (iii) above, respectively, on
such Payment Date.
With respect to any Payment Date, "Class A-1 Targeted Principal Balance"
shall equal the Series 1997-2 Participation Invested Amount multiplied by 52.0%.
With respect to any Payment Date, "Class A-2 Targeted Principal Balance"
shall equal the Series 1997-2 Participation Invested Amount multiplied by 63.0%,
less the Adjusted Security Balance of the Class A-1 Notes immediately prior to
such Payment Date after giving effect to payments of principal on the Class A-1
Notes pursuant to clause (iii)(a) above, on such Payment Date.
With respect to any Payment Date, "Class A-3 Targeted Principal Balance"
shall equal the Series 1997-2 Participation Invested Amount multiplied by 76.0%,
less the aggregate of the Adjusted Security Balances of the Class A-1 and Class
A-2 Notes immediately prior to such Payment Date after giving effect to payments
of principal on the Class A-1 and Class A-2 Notes pursuant to clauses (iii)(a)
and (iii)(b) above, on such Payment Date.
With respect to any Payment Date, the "Class B Targeted Principal Balance"
shall equal the Series 1997-2 Participation Invested Amount multiplied by 84.5%,
less the aggregate Adjusted Security Balance for the Class A Notes immediately
prior to such Payment Date after giving effect to payments of principal on the
Class A Notes pursuant to clauses (iii)(a), (iii)(b) and (iii)(c) above, on such
Payment Date.
With respect to any Payment Date, the "Minimum Security Balance" shall
equal with respect to the Class A-2 Notes, Class A-3 Notes and the Class B
Notes, $16,000,000, $30,000,000 and $19,000,000, respectively.
As to any Payment Date, "Net Charge-Off" shall equal the aggregate Optimum
Monthly Principal not distributed for this and all prior Payment Dates and
reduced by aggregate Reversals distributed on this and all prior Payment Dates.
The Net Charge-Off will be allocated to the Series 1997-2 Securities in the
manner as set forth herein under "Allocations of Defaulted Amounts and
Reversals".
As to each Payment Date, "Optimum Monthly Principal" shall mean the amount
equal to the sum of (a) the Series 1997-2 Participation Principal Distribution
Amount, (b) the amount of the reduction in the Series 1997-2 Participation
Invested Amount during the preceding Collection Period that was not included in
the Series 1997-2 Participation Principal Distribution Amount, and (c) the
lesser of (i) the amount, if any, by which the Series 1997-2 Participation
Interest Distribution Amount exceeds the sum of (x) the amounts to be
distributed on such Payment Date pursuant to clauses (i)-(ii) on page 62, and
(y) the amount referred to in clause (b) in this paragraph, and (ii) the Net
Charge-Off as of the preceding Payment Date.
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With respect to any Payment Date, the "Overcollateralization Amount" shall
equal the amount by which the Series 1997-2 Participation Invested Amount
exceeds the aggregate of the Security Balances, in each case after giving effect
to distributions on such Payment Date. As of the Closing Date, the
Overcollateralization Amount will be $51,000,000 or 4.25% of the balance of the
Series 1997-2 Participation.
The "Security Balance" of any Note on any day is the respective initial
principal balance as of the Closing Date, reduced by all payments of principal
thereon as of such day.
Allocations of Defaulted Amounts and Reversals. On each Payment Date with
respect to which the Series 1997-2 Participation is reduced due to Defaulted
Amounts during the related Collection Period and less than the Optimum Monthly
Principal is distributed in respect of principal on such Payment Date, the
amount that was not distributed shall be allocated in the following order of
priority:
(i) if the Overcollateralization Amount is zero, to the Adjusted Security
Balance of the Certificates until such balance equals zero;
(ii) to the Adjusted Security Balance of the Class B Notes until such
balance equals zero;
(iii) to the Adjusted Security Balance of the Class A-3 Notes until such
balance equals zero;
(iv) to the Adjusted Security Balance of the Class A-2 Notes until such
balance equals zero; and
(v) to the Adjusted Security Balance of the Class A-1 Notes until such
balance equals zero.
On each Payment Date with respect to which a Reversal exists, such Reversal
shall be allocated in the following order of priority:
(1) to the Adjusted Security Balance for the Class A-1 Notes until such
balance equals the Security Balance for the Class A-1 Notes;
(2) to the Adjusted Security Balance for the Class A-2 Notes until such
balance equals the Security Balance for the Class A-2 Notes;
(3) to the Adjusted Security Balance for the Class A-3 Notes until such
balance equals the Security Balance for the Class A-3 Notes;
(4) to the Adjusted Security Balance for the Class B Notes until such
balance equals the Security Balance for the Class B Notes; and
(5) to the Adjusted Security Balance for the Certificates until such
balance equals the Security Balance for the Certificates.
As to any Payment Date, "Reversals" is the sum of (a) the lesser of (i) the
Series 1997-2 Participation Interest Distribution Amount, reduced by the sum of
amounts to be distributed pursuant to clauses (i)-(iii) of Allocation of
Remittances on the Series 1997-2 Participation and the amount of the reduction
in the Series 1997-2 Participation Invested Amount during the preceding
Collection Period that was not included in the Series 1997-2 Participation
Principal Distribution Amount for the related Distribution Date, and (ii) the
Net Charge-Off, and (b) the portion of the Defaulted Amounts allocated to the
Series 1997-2 Participation on prior Distribution Dates for which payments on
the Series 1997-2 Participation Principal Distribution Amount in respect thereof
have been made on the related Distribution Date. On any Payment Date, Reversals
for such date may not exceed the amount of the Net Charge-Off on the preceding
Payment Date.
Interest. On each Payment Date, interest payments will be made on the Notes
and distributions on the Certificates at the respective Note Rates and
Certificate Rate for the related Interest Period. The "Note Rate" for an
Interest Period will generally be the per annum rate equal to the sum of (a)
LIBOR, determined as specified herein, plus (b) 0.18% per annum with respect to
the Class A-1 Notes, 0.29% per annum in the case of the Class A-2 Notes, 0.40%
per annum in the case of the Class A-3 Notes and a rate specified in the
Indenture not to exceed 0.875% per annum with respect to the Class B Notes. The
Class A-1, Class A-2, Class A-3 and Class B Note Rates are subject to maximum
rates equal to 12.5% per annum, 14.0% per annum, 14.0% per annum and 14.0% per
annum, respectively. The "Certificate Rate" will generally be the per annum rate
equal to the sum of
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(a) LIBOR, determined as specified herein, plus (b) a rate specified in the
Trust Agreement not to exceed 1.25% per annum.
Interest on the Notes and the Certificate Rate on the Certificates in
respect of any Payment Date will accrue on the applicable Security Balance from
(and including) the preceding Payment Date (or in the case of the first Payment
Date, from (and including) the date of the initial issuance of the Series 1997-2
Securities (the "Closing Date")) through (and including) the day preceding such
Payment Date (each such period, an "Interest Period") on the basis of the actual
number of days in the Interest Period and a 360-day year. Interest for any
Payment Date due but not paid on such Payment Date shall bear interest, to the
extent permitted by applicable law, at the related Note Rate until paid.
LIBOR shall be established by the Indenture Trustee and as to any Interest
Period, "LIBOR" will equal the rate for United States dollar deposits for one
month which appears on the Telerate Screen Page 3750 as of 11:00 A.M., London
time, on the second LIBOR Business Day prior to the first day of such Interest
Period (or as of two LIBOR Business Days prior to the Closing Date, in the case
of the first Interest Period). "Telerate Screen Page 3750" means the display
designated as page 3750 on the Telerate Service (or such other page as may
replace page 3750 on that service for the purpose of displaying London interbank
offered rates of major banks). If such rate does not appear on such page (or
such other page as may replace that page on that service, or if such service is
no longer offered, such other service for displaying LIBOR or comparable rates
as may be selected by the Indenture Trustee after consultation with the
Servicer), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the
Indenture Trustee after consultation with the Servicer) as of 11:00 A.M., London
time, on the day that is two LIBOR Business Days prior to the immediately
preceding Payment Date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the Security Balance then
outstanding. The Indenture Trustee will request the principal London office of
each of the reference banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate will be the arithmetic mean of the
quotations. If on such date fewer than two quotations are provided as requested,
the rate will be the arithmetic mean of the rates quoted by one or more major
banks in New York City, selected by the Indenture Trustee after consultation
with the Servicer, as of 11:00 A.M., New York City time, on such date for loans
in U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Security Balance then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior Payment
Date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the States of New York or
Illinois or in the City of London, England are required or authorized by law to
be closed.
If Notes are listed on the Luxembourg Stock Exchange, on the first day of
each Interest Period, the Servicer will inform the Luxembourg Stock Exchange of
the applicable Payment Date and the rate at which interest will accrue on each
Class of Notes during the Interest Period.
Principal. On each Payment Date, to the extent funds are available
therefor, other than the Payment Date in November 2007, principal payments
except as provided below will be due and payable on the Notes in the respective
amounts described under Allocation of Remittances on the Series 1997-2
Participation. On the Payment Date in November 2007, principal will be due and
payable on the Notes in amounts equal to the Security Balance for each such
Class on such Payment Date. In addition, on any Payment Date, to the extent of
funds available therefor, each Class of Notes will also be entitled to receive
principal payments in respect of the Accelerated Principal Payment Amount, as
further described above under Allocation of Remittances on the Series 1997-2
Participation. In no event will principal payments on the Notes on any Payment
Date exceed the Security Balance thereof on such date.
Overcollateralization Amount. The payment of the Accelerated Principal
Payment Amounts, if any, to Noteholders will increase the Overcollateralization
Amount. The Overcollateralization Amount will be available to absorb any
Defaulted Amounts that are allocated to the Noteholders or to the
Certificateholders and not covered by remittances on the Series 1997-2
Participation. The "Initial Overcollateralization Amount" is equal to
$51,000,000 or 4.25% (the "Initial Overcollateralization Percentage") of the
Initial Series 1997-2 Participation as
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of the Closing Date. On each Payment Date, the "Overcollateralization Amount" is
the amount by which the Series 1997-2 Participation Invested Amount as of the
end of the related Collection Period exceeds the sum of the Security Balance of
each Class of Notes and the Security Balance of Certificates on such day (after
giving effect to all amounts distributable and allocable to principal on the
Series 1997-2 Securities on such Payment Date).
EARLY AMORTIZATION PERIOD
An "Early Amortization Period" will begin with the first day of the
Collection Period in which an Amortization Event has occurred. Upon commencement
of an Early Amortization Period, Interest Collections and Principal Collections
will be allocated to the Series 1997-2 Participation based upon the Fixed
Allocation Percentage which gives the Series 1997-2 Participation a greater
share of such collections each month. See "Maturity and Prepayment
Considerations" herein.
An "Amortization Event" will be deemed to occur:
(a) upon failure on the part of the Seller (i) to make any payment or
deposit required under the Pooling and Servicing Agreement within five
Business Days after the date such payment or deposit is required to be
made; or (ii) to observe or perform in any material respect any other
covenants or agreements of the Seller set forth in the Pooling and
Servicing Agreement as a result of which the interests of holders of
interest in the Deposit Trust are materially and adversely affected, which
failure continues unremedied for a period of 60 days after written notice;
(b) if any representation or warranty made by the Seller in the Pooling and
Servicing Agreement proves to have been incorrect in any material respect
when made, as a result of which the interests of holders of interest in the
Deposit Trust are materially and adversely affected, and which continues
for a period of 60 days after written notice to be incorrect in any respect
that materially and adversely affects the holders of interests in the
Deposit Trust; provided, however, that an Amortization Event shall not be
deemed to occur if the Seller has repurchased the related Receivables,
during such period (or within an additional 60 days with the consent of the
Deposit Trustee) in accordance with the provisions of the Pooling and
Servicing Agreement;
(c) upon the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Seller;
(d) if the Deposit Trust or the Issuer becomes subject to regulation by the
Commission as an investment company within the meaning of the Investment
Company Act of 1940, as amended;
(e) if a Servicer Default occurs under the Pooling and Servicing Agreement;
(f) if the percentage (averaged over any three consecutive months) obtained
by dividing (i) the Overcollateralization Amount by (ii) the outstanding
principal balance of the Series 1997-2 Participation is reduced below
4.25%; and
(g) the portion of the Seller's Trust Amount owned by Household Consumer
Loan Corporation is reduced below 1.01% of the aggregate invested amounts
or certificate principal balances, as specified in each Series Supplement
to the Pooling and Servicing Agreement for all outstanding Series
Participation Interests.
In the case of any event described in (a), (b) or (e), an Amortization
Event will be deemed to have occurred only if, after any applicable grace period
described in such clauses, either the Deposit Trustee, or, holders of at least
50% of each outstanding Series Participation Interest in the Deposit Trust, by
written notice to the Seller and the Servicer (and to the Trustee, if given by
the holders of interests in the Deposit Trust) declare that an Amortization
Event has occurred as of the date of such notice. In the case of any event
described in clauses (c), (d), (f) or (g), an Amortization Event will be deemed
to have immediately occurred without any notice or other action on the part of
the Deposit Trustee or the holders of Series Participation Interests in the
Deposit Trust.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller and no Amortization Event
exists other than such conservatorship, receivership or insolvency of the
Seller, the conservator, receiver or trustee-in-bankruptcy may have the power to
prevent the commencement of the Early Amortization Period.
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MATURITY
The Notes will mature on the earlier of the date the Notes are paid in full
or on the Payment Date occurring in November 2007. In the event there are
insufficient funds to retire the Notes on the Payment Date occurring in November
2007, an Event of Default will occur. See "-- Events of Default; Rights Upon
Event of Default" below. In addition, the Issuer will pay the Notes in full on
the Payment Date following exercise by the Seller of its option to purchase the
Series 1997-2 Participation after the aggregate Security Balance of the Series
1997-2 Securities is reduced to an amount less than or equal to $114,900,000
(10% of the initial aggregate Security Balance of the Series 1997-2 Securities).
The purchase price will be equal to the sum of the unpaid principal balance of
the Series 1997-2 Participation and accrued and unpaid interest thereon at the
weighted average of the Note Rates and the Certificate Rate through the day
preceding the call date. Under certain circumstances in the event of a Servicer
Default, the Seller may repurchase each outstanding Series Participation
Interest, including the Series 1997-2 Participation, at a price equal to the
outstanding principal balance of each Series Participation Interest, plus
accrued and unpaid interest at the applicable pass-through rates. In such event,
the Series 1997-2 Securities will be paid in full.
The Paying Agent. The Paying Agent shall initially be the Indenture
Trustee, together with any successor thereto in such capacity (the "Paying
Agent"). The Paying Agent shall have the revocable power to withdraw funds from
the Payment Account for the purpose of making payments to the Securityholders.
REPORTS TO NOTEHOLDERS
Concurrently with each distribution to the Noteholders, the Indenture
Trustee will prepare and forward to each Noteholder a statement setting forth
certain information, including the following:
(i) remittances on the Series 1997-2 Participation for the related
Collection Period;
(ii) the Series 1997-2 Participation Invested Amount;
(iii) the aggregate Principal Balance of the Receivables as of the last day
of the related Collection Period;
(iv) the Adjusted Security Balance of each class of Notes and of the
Certificates after giving effect to the distribution of principal on such
Payment Date;
(v) the Overcollateralization Amount after giving effect to the payments to
be made on the Notes and the Certificates on such Payment Date;
(vi) the amount of principal distributable on such Payment Date to
Noteholders separately stating the portion thereof in respect of Defaulted
Amounts allocated to the Notes that was not included in the Principal
Distribution Amount for the Distribution Date related to the period in
which such Defaulted Amount was incurred and the Accelerated Principal
Payment Amount and stating the amount of any remaining Defaulted Amounts
not previously distributed;
(vii) the amount of interest distributable on such Payment Date to
Noteholders separately stating the portion thereof in respect of overdue
accrued interest and stating the amount of remaining overdue accrued
interest; and
(viii) the Seller's Trust Amount after giving effect to the payments made
on the Notes and the Certificates on such Payment Date.
In the case of information furnished pursuant to clauses (vi) and (vii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, an "Event of Default" under the Indenture exists
at any time when any one of the following events occurs: (i) interest due and
payable on any Note is not paid within five days of the date such payment was
due; (ii) any payment of principal on a Note is not made when the payment is due
and payable; (iii) a default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture, or any representation or warranty
of the Issuer made in the Indenture or in any certificate or other writing
delivered pursuant hereto or in connection herewith is proven to have been
incorrect in any material respect as of the time when the representation or
warranty was made and has a material adverse effect on Noteholders, and
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such default shall continue or not be cured, or the circumstance or condition in
respect of which such representation or warranty was incorrect shall not have
been eliminated or otherwise cured, for a period of 30 days after there shall
have been given, by registered or certified mail, to the Issuer by the Indenture
Trustee or to the Issuer and the Indenture Trustee by the Holders of at least
25% in principal amount of the Notes then outstanding, a written notice
specifying such default or incorrect representation or warranty and requiring it
to be remedied and stating that such notice is a notice of default hereunder;
(iv) the filing of a decree or order for relief by a court having jurisdiction
over the Issuer or any substantial part of the Trust Assets in an involuntary
case under any applicable federal or state bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Issuer or
for any substantial part of the Trust Assets, or ordering the winding-up or
liquidation of the Issuer's affairs, and such decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; or (v) the
commencement by the Issuer of a voluntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or hereafter in effect, or
the consent by the Issuer to the entry of an order for relief in an involuntary
case under any such law, or the consent by the Issuer to the appointment or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial part of
the Trust Assets, or the making by the Issuer of any general assignment for the
benefit of creditors, or the failure by the Issuer generally to pay its debts as
such debts become due, or the taking of any action by the Issuer in furtherance
of any of the foregoing. If there is an Event of Default due to late payment or
nonpayment of interest or principal on a Note, interest will continue to accrue
on such principal at the Note Rate until such principal is paid. If an Event of
Default should occur and be continuing with respect to the Notes, the Indenture
Trustee or holders of a majority in principal amount of Notes then outstanding
may declare the principal of such Notes to be immediately due and payable. Such
declaration may, under certain circumstances, be rescinded by the holders of a
majority in principal amount of the Notes then outstanding.
If the Notes are due and payable following an Event of Default with respect
thereto, the Indenture Trustee may institute proceedings to collect amounts due
or foreclose on property comprising Trust Assets or exercise remedies as a
secured party. Unless the Indenture Trustee determines that the Series 1997-2
Participation will not provide sufficient funds for the payment of principal and
interest on the Notes as such payments would become due, any sale, liquidation
or other disposition of the Trust Assets for an amount less than the amounts due
on the Notes will not occur without the consent of all of the Noteholders. If
the Indenture Trustee makes such a determination, it may sell, liquidate or
otherwise dispose of the Trust Assets for less than the amount due on the Notes
provided that the consent of Noteholders of not less than 66 2/3% of the
Security Balance of the Notes is obtained. After payment of the amounts due and
owing the Indenture Trustee, the proceeds of any sale, liquidation or other
deposition of the Trust Assets will be applied sequentially to pay all amounts
due and owing on the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, and
Class B Notes, and to pay all amounts distributable on the Certificates.
If an Event of Default occurs and is continuing with respect to the Notes,
the Indenture Trustee will be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the holders
of the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the holders of the outstanding
Notes. No holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% of the aggregate Security Balance of all
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
holder or holders have offered the Indenture Trustee reasonable indemnity, (iv)
the Indenture Trustee has for 60 days failed to institute such proceeding and
(v) no direction inconsistent with such written request has been given to the
Indenture Trustee during the 60-day period by the holders of a majority of the
aggregate Security Balance of all outstanding Notes.
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In addition, the Indenture Trustee and the Noteholders, by accepting the Notes,
covenant that they will not at any time institute against the Issuer or the
Seller any bankruptcy, reorganization or other proceeding under any federal or
state bankruptcy or similar law. With respect to the Issuer, neither the
Indenture Trustee nor the Owner Trustee in its individual capacity, nor any
holder representing an ownership interest in the Issuer nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Issuer contained in the
Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Notes then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Noteholder or Certificateholder. The Issuer
may not, among other things, (i) except as expressly permitted by the Indenture,
sell, transfer, exchange or otherwise dispose of any of the assets of the
Issuer, (ii) claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes (other than amounts withheld under the
Code or applicable state law) or assert any claim against any present or former
Holder of Notes for payment of taxes levied or assessed upon the Issuer, (iii)
permit the validity or effectiveness of the Indenture to be impaired or permit
any person to be released from any covenants or obligations with respect to the
Notes under the Indenture except as may be expressly permitted thereby or (iv)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Issuer or any part thereof, or any interest therein or the
proceeds thereof. The Issuer may not engage in any activity other than as
specified under the Trust Agreement.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery of all the Notes to the Indenture Trustee for
cancellation or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the Security Balance of
each Class of Notes affected thereby, the Issuer and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided below)
in any manner the rights of the Noteholders. However, without the consent of the
holder of each outstanding Note affected thereby, no supplemental indenture
will: (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change any place of
payment where or the coin or currency in which any Note or any interest thereon
is payable; (ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate Security Balance of the outstanding Notes, which is
required to approve any supplemental indenture, waive compliance with certain
provisions of the Indenture or waive certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) except in the
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limited circumstance described in the following paragraph, modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Seller or an affiliate of any of them; (v) decrease the percentage of the
aggregate Security Balance of Notes required to amend the sections of the
Indenture which specify the applicable percentage of the aggregate Security
Balance of the Notes necessary to amend the Indenture or certain other related
agreements; (vi) modify any of the provisions of the Indenture in such manner as
to affect the calculation of the amount of any payment of interest of principal
due on any Note (including the calculation of any of the individual components
of such calculation); or (vii) permit the creation of any lien ranking prior to
or, except as otherwise contemplated by the Indenture, on a parity with the lien
of the Indenture with respect to any of the Trust Assets or, except when the
full amount required to pay the Notes in full has been deposited or is held in
trust, terminate the lien of the Indenture on any such collateral or deprive the
holder of any Note of the security afforded by the lien of the Indenture.
At the time of the first sale of a Class B Note to a party that is not an
affiliate of the Seller, by mutual agreement of the Class B Noteholders and the
Issuer, but without the consent of any Class A Noteholder, the per annum
percentage that is added to LIBOR to determine the Class B Note Rate may be
modified to a percentage that does not exceed 0.875% per annum.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures without obtaining the consent of the Noteholders, for the purpose of,
among other things, curing any ambiguity or correcting or supplementing any
provision in the Indenture that may be inconsistent with any other provision
therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer or any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Issuer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
DUTIES OF THE INDENTURE TRUSTEE
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Indenture, the Series 1997-2 Securities or of the Trust
Assets or related documents. If no Event of Default has occurred, the Indenture
Trustee is required to perform only those duties specifically required of it
under the Indenture. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Deposit Trustee
is required to examine them to determine whether they are in the form required
by the Indenture; however, the Indenture Trustee will not be responsible for the
accuracy or content of any such documents.
The Indenture Trustee may be held liable for its own negligent action or
failure to act, or for its own misconduct; provided, however, the Indenture
Trustee will not be personally liable with respect to any action taken, suffered
or omitted to be taken by it in good faith in accordance with the direction of
the Holders in an Event of Default. The Indenture Trustee is not required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the Indenture, 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.
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ACTIONS IN RESPECT OF SERIES 1997-2 PARTICIPATION
If at any time the Indenture Trustee, as the pledgee of the Series 1997-2
Participation is requested in such capacity to take any action or to give any
approval or waiver, including, without limitation, in connection with an
amendment of the Pooling and Servicing Agreement, or if any Servicer Default
occurs, so long as any Notes are outstanding the Indenture Trustee may either
take any action in connection with the enforcement of any rights and remedies
available to it as it deems in the best interests of the Noteholders, or it may
notify all of the Noteholders of the substance of any such amendment, approval
or waiver and act in accordance with the written direction of Noteholders
evidencing at least a majority of the aggregate Security Balance of the Notes.
RESIGNATION OF INDENTURE TRUSTEE
The Indenture Trustee may, upon written notice to the Seller and the
Issuer, resign at any time, in which event the Issuer will be obligated to use
its best efforts to appoint a successor Indenture Trustee. If no successor
Indenture Trustee has been appointed and has accepted the appointment within 30
days after giving such notice of resignation, the resigning Indenture Trustee,
the Issuer or the Noteholders evidencing at least a majority of the Security
Balance of the Notes may petition any court of competent jurisdiction for
appointment of a successor Indenture Trustee. The Indenture Trustee may also be
removed at any time (i) if the Indenture Trustee ceases to be eligible to
continue as such under the Indenture, (ii) if the Indenture Trustee becomes
insolvent or (iii) by the holders of a majority of the aggregate Security
Balance of the Notes upon written notice to the Indenture Trustee and to the
Seller. Any resignation or removal of the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
REGISTRATION OF NOTES
Note Owners may hold their Notes through DTC (in the United States) or
Cedel or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
The Notes will initially be registered in the name of CEDE & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Cedel and
The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Depositary" and collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel 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 Cedel
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 its 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 (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel
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
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the
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relevant Cedel 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 and State Income Tax Consequences"
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
hereto.
Note Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Notes may do so only through Participants or
indirect participants (unless and until Replacement Notes, as defined below, are
issued). In addition, Note Owners will receive all distributions of principal
of, and interest on, the Notes from the Indenture Trustee through DTC and
Participants. Note Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below.
Unless and until Replacement Notes are issued, it is anticipated that the
only Noteholder of the Notes will be CEDE & Co., as nominee of DTC. Note Owners
will not be Noteholders as that term is used in the Indenture. Note Owners are
only permitted to exercise the rights of Noteholders indirectly through
Participants and DTC.
While the Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Notes and is
required to receive and transmit distributions of principal of, and interest on,
the Notes. Participants and indirect participants with whom Note Owners have
accounts with respect to Notes are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Note Owners. Accordingly, although Note Owners will not possess
certificates, the Rules provide a mechanism by which Note Owners will receive
distributions and will be able to transfer their interests.
Unless and until Replacement Notes are issued, Note Owners who are not
Participants may transfer ownership of Notes only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Notes, by book-entry transfer, through DTC for the account of the
purchasers of such Notes, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Notes will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Note Owners.
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 Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
1934 Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants").
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilities the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in a number of
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel 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 Cedel is also available to
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others, such as banks, brokers dealers and trust companies that clear through or
maintain a custodial relationship with a Cedel Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in a number of currencies, including United
States dollars. Euroclear includes various other services, including securities
lending 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 (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative 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
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
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.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Certain
Federal and State Income Tax Consequences". Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Noteholder under the Indenture on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf through
DTC.
Notes will be issued in registered form to Note Owners, or their nominees,
rather than to DTC (such Notes being referred to herein as "Replacement Notes"),
only if (i) DTC or HFC advises the Indenture Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Notes and HFC or the Indenture Trustee is unable
to locate a qualified successor, (ii) HFC, at its sole option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Default, DTC, at the direction of Class A and Class B Note Owners
evidencing at least a majority of the then outstanding Security Balance of each
such Class, advises DTC in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of Note
Owners. Upon issuance of Replacement Notes to Note Owners, such Notes will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Indenture Trustee with respect to transfers,
notices and distributions.
DTC has advised HFC and the Indenture Trustee that, unless and until
Replacement Notes are issued, DTC will take any action permitted to be taken by
a Noteholder under the Indenture only at the direction of one or more
Participants to whose DTC accounts the Notes are credited. DTC may take actions,
at the direction of the related Participants, with respect to some Notes which
conflict with actions taken with respect to other Notes.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect participants and certain banks, the ability of holders of
beneficial interests in the Notes to pledge such Notes to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of such Notes, may be limited due to the lack of a definitive certificate for
such Notes.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
In the event Replacement Notes are issued, transfers may be effected
through the Indenture Trustee or if Notes are listed on the Luxembourg Stock
Exchange, Banque Internationale a Luxembourg (the "Luxembourg Paying Agent").
Payments on Replacement Notes will be made by either the Indenture Trustee or if
Notes are listed on the Luxembourg Stock Exchange, the Luxembourg Paying Agent,
acting as a transfer agent.
ADMINISTRATION AGREEMENT
Pursuant to the Administration Agreement, the Administrator will perform
certain duties of the Issuer, Owner Trustee and Seller under the Indenture and
the Trust Agreement. Such duties include, but are not limited to, the
preparation, delivery and/or filing of required reports, notices, certificates,
tax returns, opinions and other documents as required under the Indenture or the
Trust Agreement. The Administrator will also monitor and advise the Owner
Trustee when action is required to comply with the Issuer's duties under such
agreements. Subject to certain limitations contained in the Administration
Agreement, the Administrator will indemnify the Indenture Trustee, Owner Trustee
and Seller, and each of their respective agents, for any loss, liability or
expense incurred by reason of the willful misconduct, gross negligence or bad
faith of the Administrator in the performance of its obligations under the
Administration Agreement. A form of the Administration Agreement is filed as an
exhibit to the registration statement of which this Prospectus is a part.
DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
The Receivables transferred to the Deposit Trust by the Seller are acquired
by the Seller from the Subservicers pursuant to the Receivables Purchase
Agreement between the Seller, as purchaser of the Receivables, and the
Subservicers, as owners of the Credit Line Agreements and sellers of the
Receivables. The Receivables Purchase Agreement is incorporated as an exhibit to
the Registration Statement of which this Prospectus is a part. Under the
Receivables Purchase Agreement, the Subservicers agreed to sell or transfer the
Receivables to the Seller in accordance with the terms set forth therein.
Pursuant to the Pooling and Servicing Agreement, such balances are immediately
transferred by the Seller to the Deposit Trust. The Seller also assigned its
rights under the Receivables Purchase Agreement with respect to such balances to
the Deposit Trust. The following summary describes certain terms of the
Receivables Purchase Agreement and is qualified in its entirety by reference to
the Receivables Purchase Agreement.
SALE OF RECEIVABLES
Pursuant to the Receivables Purchase Agreement, the Subservicers have sold
or will sell to the Seller all their right, title and interest in and to all of
the Receivables, consisting of the Initial Receivables arising under the Credit
Line Agreements, all Additional Balances thereafter arising under such Credit
Line Agreements and the Receivables arising under each Aggregate Additional
Credit Line designated to the Deposit Trust, whether existing on the date a
Credit Line is designated or arising under such Credit Line thereafter. The
purchase price of the purchased Receivables will not be less than the principal
amount thereof as of the time of sale plus the present value of anticipated
excess spread.
In connection with each sale of the Receivables to the Seller, the
Subservicers indicate in their computer files that the Receivables have been
sold to the Seller by the Subservicers and that such Receivables have been sold
or transferred by the Seller to the Deposit Trust. In addition, the Subservicers
provide to the Seller a computer file or a microfiche list containing a true and
complete list showing each Credit Line, identified by account number and by
total outstanding balance on the applicable date of designation. The records and
agreements relating to the
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Credit Lines and Receivables are not segregated by the Subservicers from other
documents and agreements relating to other credit line accounts and receivables
and are not stamped or marked to reflect the sale or transfer of the Receivables
to the Seller. However, the computer records of the Subservicers are marked to
evidence such sale or transfer. The Subservicers have filed UCC financing
statements meeting the requirements of applicable state laws in each of the
jurisdictions in which such filings are required and will make any subsequent
filings required in order to maintain the lien priority with respect to the
Receivables in the Credit Lines. See "Risk Factors -- Sale of Assets; Insolvency
Considerations" and "Certain Legal Aspects of the Receivables".
Pursuant to the Receivables Purchase Agreement, the Subservicers may agree
from time to time with the Seller to designate Aggregate Additional Credit
Lines. See "Description of Deposit Trust -- Additions of Credit Lines". The
purchase price for Credit Lines so designated will not be less than an amount
equal to the Principal Receivables conveyed by the Subservicers to the Seller
plus the present value of anticipated excess spread.
REPRESENTATIONS AND WARRANTIES
In the Receivables Purchase Agreement, each Subservicer severally, and not
jointly, represents and warrants to the Seller to the effect, among other
things, that as of the Initial Issuance Date and each date when Aggregate
Additional Credit Lines are designated to the Seller, that (a) the Receivables
Purchase Agreement constitutes a legal, valid and binding obligation of the
Subservicer, (b) as of each date of designation with respect to Aggregate
Additional Credit Lines, each Aggregate Additional Credit Line will be an
Eligible Credit Line, (c) as of each date of designation with respect to
Aggregate Additional Credit Lines, each Receivable generated thereunder is an
Eligible Receivable, and (d) the Receivables Purchase Agreement constitutes a
valid sale to the Seller of all right, title and interest of the Subservicers in
and to the Receivables, existing and thereafter created in the Credit Lines and
in the proceeds thereof or, if held not to constitute a sale, constitutes a
grant of a security interest in the Receivables. If the breach of any of the
representations and warranties described in this paragraph results in the
obligation of the Seller under the Pooling and Servicing Agreement to accept
reassignment of the Receivables, the Subservicer that maintains the related
Credit Line will repurchase such Receivables from the Seller for an amount equal
to the unpaid principal balance thereof, plus accrued and unpaid finance charges
from the last date billed through the end of the current Collection Period.
CERTAIN COVENANTS
In the Receivables Purchase Agreement, the Subservicers covenant to perform
their obligations under the Credit Line Agreements and the Subservicers'
policies and procedures relating to the Credit Line Agreements, as they may be
amended from time to time. In that regard, the Subservicers may change the terms
and provisions of such Credit Line Agreements or policies and procedures in any
respect (including, without limitation, the calculation of the amount or timing
of charge-offs and changes in the Loan Rates), so long as the Subservicers
reasonably believe such action will not have an Adverse Effect on the
Securityholders and such changes are made in accordance with all applicable
laws.
In addition, the Subservicers expressly acknowledge and consent to the
Seller's assignment of its rights relating to the Receivables under the
Receivables Purchase Agreement to the Deposit Trustee for the benefit of the
holders of interests in the Deposit Trust. The Subservicers also agree, for the
benefit of the Deposit Trust, that any collections or Recoveries on the
Receivables received by the Subservicers will be paid to the Seller, or at the
request of the Seller, to the Servicer, as soon as practicable after receipt
thereof.
AMENDMENTS
The Receivables Purchase Agreement may be amended by the Seller and the
Subservicers without the consent of the holders or beneficiaries of any Series
Participation Interest, including the Securityholders. However, as certified by
the Seller, no such amendment may have an Adverse Effect on the Securityholders.
SALE OF CREDIT LINE AGREEMENTS
The Subservicers have the right to transfer their respective interests in
the Credit Line Agreements provided that (i) if such transferee is not an
affiliate of the Servicer, the Rating Agencies have notified the Seller and the
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Subservicers that such transfer will not result in a reduction or withdrawal of
the rating of the Series 1997-2 Securities, and (ii) the purchaser agrees in
writing to assume all obligations of the applicable Subservicer as contained in
the Receivables Purchase Agreement.
TERMINATION
The Receivables Purchase Agreement will terminate immediately after the
Deposit Trust terminates. In addition, if a conservator, trustee or receiver is
appointed for the Subservicers, the Subservicers will immediately cease to sell
or transfer Receivables and Additional Balances to the Seller and promptly give
notice of such event to the Seller and to the Deposit Trustee.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
Each of the Subservicers will sell the Receivables to the Seller and the
Seller, in turn, will transfer all Receivables to the Deposit Trust. Each of the
Subservicers will represent and warrant that its respective transfers to the
Seller constitute valid sales and assignments of all of its respective right,
title and interest in and to the Receivables. The Seller will represent and
warrant that each of its transfers constitute either a valid sale and assignment
to the Deposit Trust of all of its right, title and interest in and to the
Receivables, subject to its interest as holder of the Seller's Interest, or a
grant of a security interest to the Deposit Trust in and to the Receivables. In
the event the assignment is held to be the grant of a security interest, the
Seller also represents and warrants that there will exist a valid, subsisting
and enforceable first priority perfected security interest in the Receivables in
favor of the Deposit Trust. Such perfected security interest will be maintained
until the Deposit Trust terminates. For a discussion of the Deposit Trust's
rights in the event these representations and warranties are breached, see
"Description of the Deposit Trust -- Representations and Warranties".
Each of the Subservicers and the Seller will represent that the Receivables
are either "accounts" or "general intangibles" for purposes of the UCC. If a
transfer of the Receivables by a Subservicer or the Seller is deemed to be
either a sale of accounts or a transfer of accounts or general intangibles as
security for an obligation, such transfer will be treated under the UCC as
creating a security interest in such Receivables. In such case, the Deposit
Trust will have perfected its security interest in such Receivables by its and
the Seller's filing of the appropriate financing statements under the UCC. If
any transfer of the Receivables is deemed to be a sale of general intangibles,
then the UCC is not applicable and no further action under the UCC is required
to protect the Deposit Trust's interest in the Receivables from third parties.
There are certain limited circumstances under the UCC in which prior or
subsequent transferees of Receivables coming into existence after the Closing
Date could have an interest in such Receivables with priority over the Deposit
Trust's interest. A tax or other government lien on property of the Seller, or a
Subservicer may also have priority over the interest of the Deposit Trust in
such Receivables. Under the Receivables Purchase Agreement, however, each of the
Subservicers will warrant that it has transferred the Receivables to the Seller
free and clear of the lien of any third party. In addition, each of the
Subservicers will covenant that it will not sell, pledge, assign, transfer or
grant any lien on any Receivable (or any interest therein) other than to the
Seller.
CERTAIN MATTERS RELATING TO INSOLVENCY
Each of the Subservicers and the Seller believes that the transfers of the
Receivables pursuant to the Receivables Purchase Agreement are sales of the
Receivables. The Seller believes that the transfers of the Receivables pursuant
to the Pooling and Servicing Agreement are either sales of the Receivables to
the Deposit Trust or a grant to the Deposit Trust of a security interest in all
such Receivables. However, in the event of an insolvency of a Subservicer and/or
the Seller, it is possible that a receiver, conservator or trustee in bankruptcy
could, under the federal bankruptcy laws, challenge the Seller's and/or the
Deposit Trust's right to payments from, and ownership of, the Receivables, as
well as the Issuer's beneficial interest therein, under one or more of the
theories set forth below, or otherwise. Similarly, while the Seller believes its
assignment of the Series 1997-2 Participation to the Issuer is either a sale of,
or a grant of a security interest in, such asset or the Receivables, in
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the event of the insolvency of the Seller or the Deposit Trust, a receiver,
conservator or trustee in bankruptcy possibly could challenge the Issuer's right
to remittances on the Series 1997-2 Participation. In such event, delays in
payments on the Series 1997-2 Securities and reductions in the amount of those
payments could occur.
A receiver, conservator or trustee in bankruptcy could attempt to
recharacterize any of the transactions between the Subservicers, the Seller and
the Deposit Trust as a loan of the purchase price from the purchaser of the
Receivables in conjunction with a pledge by the seller of the Receivables to
secure repayment of such loan. Based upon an opinion of Katten Muchin & Zavis,
special counsel to the Seller, that the conveyance of the Receivables by the
Subservicers to the Seller would be deemed a true sale of such assets, which
opinion is subject to various assumptions and qualifications set forth therein,
the Subservicers and the Seller believe that a trustee-in-bankruptcy or receiver
would be unable to successfully challenge the transfer of the Receivables from
the Subservicers to the Seller and the subsequent transfer to the Deposit Trust
or to interfere with the timely transfer to the Deposit Trustee of payments
received with respect to the Receivables. Moreover, even if a receiver,
conservator or trustee in bankruptcy were to so recharacterize any transfer of
the Receivables, if the security interest granted by a Subservicer or the
Seller, as the case may be, in the Receivables was validly perfected prior to
such party's insolvency, and was not taken in contemplation of such party's
insolvency, such security interest should not be subject to avoidance, and
payments to the Seller or the Deposit Trust, as the case may be, with respect to
the Receivables should not be subject to recovery by a receiver, conservator or
trustee in bankruptcy. Nonetheless, a conservator, receiver or trustee in
bankruptcy could assert a contrary position.
Even accepting a transfer of the Receivables as a "true sale," a receiver,
conservator or trustee in bankruptcy could still attempt to avoid any such
transfer by employing the argument, developed by the Tenth Circuit in Octagon
Gas Systems, Inc. v. Rimmer, that accounts transferred in a "true sale" by a
seller to a buyer may nonetheless constitute property of the seller's bankruptcy
estate. Each of the Subservicers and the Seller believes that Octagon is
unlikely to be binding precedent as applied to any transfers of the Receivables
given that the Tenth Circuit's reasoning in the Octagon decision has not been
widely followed outside the Tenth Circuit and the transfers of the Receivables
do not have any particular link with the Tenth Circuit.
In addition, a receiver, conservator or trustee in bankruptcy could
challenge the validity or otherwise impair the benefits of a transfer of the
Receivables under federal bankruptcy laws on grounds including the following:
the transfer was made pursuant to an executory contract; the transfer was a
preferential payment made within certain periods prior to the filing of a
bankruptcy case; and/or the transfer was made between parties that should be
substantively consolidated.
Upon the appointment of a receiver, conservator or trustee in bankruptcy or
upon a voluntary liquidation with respect to the Seller (an "Insolvency Event"),
notice thereof will promptly be provided to the Deposit Trustee and the
Indenture Trustee, which will result in the occurrence of an Amortization Event.
Pursuant to the Pooling and Servicing Agreement, thereafter Additional Balances
will not be transferred to the Deposit Trust and the Deposit Trustee will
proceed to sell, dispose or otherwise liquidate the Receivables, unless holders
of in excess of 50% of the aggregate principal amount of all outstanding Series
Participation Interests otherwise direct. An Insolvency Event also triggers a
termination of the Issuer unless within a specified period of time holders of
more than 50% of the Security Balance of the Certificates instruct otherwise
(assuming that the receiver, conservator or trustee in bankruptcy does not order
such a sale despite such instructions). In the event such dissolution proceeds,
the Indenture Trustee will be directed to sell, dispose of or otherwise
liquidate the Series 1997-2 Participation in a commercially reasonable manner
and on commercially reasonable terms. The proceeds from the sale of the Series
1997-2 Participation will be treated as collections of the Receivables and
deposited into the Payment Account. This procedure could be delayed, as
described above. In addition, upon the occurrence of an Amortization Event, if a
receiver, conservator or trustee in bankruptcy, is appointed for the Seller and
no Amortization Event other than such appointment or insolvency of the Seller
exists, the receiver, conservator or trustee in bankruptcy may have the power to
prevent the early sale, liquidation or disposition of the Series 1997-2
Participation and the commencement of the Early Amortization Period. See
"Description of the Securities -- Early Amortization Period".
In addition, application of federal bankruptcy and state debtor relief laws
to any borrower could affect the interests of the Deposit Trust in any related
Receivables if the enforcement of such laws result in such
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Receivables conveyed to the Deposit Trust being written off as uncollectible by
the Servicer. Whether or not any such Receivables are written off as
uncollectible, delays in payments due on such Receivables could result. See
"Description of the Deposit Trust -- Representations and Warranties".
While HFC is the Servicer, cash collections held by HFC may, subject to
certain conditions, be commingled and used for the benefit of HFC prior to each
Distribution Date and, in the event of the insolvency or receivership of HFC or,
in certain circumstances, the lapse of certain time periods, the Deposit Trust
may not have a perfected interest in such collections. However, unless otherwise
agreed to by the applicable Rating Agency, if the commercial paper rating of HFC
is reduced below A-1 or P-1 by the applicable Rating Agency, HFC will, within
five business days, be required to commence the deposit of collections directly
into the Collection Account within two business days of the day of processing.
See "Description of the Deposit Trust -- Payments on Credit Lines; Deposits to
Collection Account".
As a business corporation, the Seller may be made the subject of a
bankruptcy or similar state law proceeding in appropriate circumstances. The
Seller will not engage in any activities except purchasing Receivables from the
Subservicers or other originators, forming the Deposit Trust or trusts similar
thereto, transferring Receivables to such trusts, causing the formation of
trusts such as the Issuer, causing such trusts to issue securities and engaging
in activities incident to, or necessary or convenient to accomplish, the
foregoing. The Seller has no current intention of filing a voluntary petition
under the Bankruptcy Code or any similar applicable state law.
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and no Servicer Default other than such bankruptcy or
insolvency related Servicer Default exists, the trustee in bankruptcy may have
the power to prevent either the Deposit Trustee or the holders of Series
Participation Interests from appointing a successor Servicer. See "Description
of the Deposit Trust -- Servicer Defaults" and "-- Rights Upon a Servicer
Default".
CONSUMER PROTECTION LAWS
The relationship of the borrower and the issuer of a credit line is
extensively regulated by federal and state consumer protection laws and
regulations. With respect to credit lines issued by the Subservicers, the most
significant federal laws include the Federal Truth-in-Lending, Equal Credit
Opportunity, Fair Credit Reporting, Fair Debt Collection Practices and Real
Estate Settlement Procedures Acts. These statutes and the regulations thereunder
impose various disclosure requirements, prohibit certain discriminatory
practices in extending credit and regulate practices followed in collections.
Congress and the states may enact new laws and amendments to existing laws to
regulate further the consumer credit industry.
The Deposit Trust may be liable for certain violations of consumer
protection laws that apply to the Receivables, either as assignee from the
Seller (as a Subservicer's assignee) with respect to obligations arising before
transfer of the Receivables to the Deposit Trust or as the party directly
responsible for obligations arising after the transfer. In addition, a borrower
may be entitled to assert such violations by way of set-off against the
obligation to pay the amount of Receivables owing. All Receivables that were not
created in compliance in all material respects with the requirements of such
laws (if such noncompliance has a material adverse effect on the holders of
interests therein) will be reassigned to the Seller. The Servicer has also
agreed in the Pooling and Servicing Agreement to accept assignment from the
Deposit Trust of Receivables existing under Credit Lines with respect to which
the Servicer has breached certain representations and warranties. See
"Description of the Deposit Trust -- Representations and Warranties".
POTENTIAL LEGISLATION
Legislation proposing new laws and amendments to existing laws can be
expected to be introduced in Congress and certain state and local legislatures
from time to time that, if enacted, would further regulate the consumer credit
industry. In particular, the issue of federal regulation of interest rates on
consumer loans continues to be debated, and there can be no assurance that such
a bill will not become law in the future. Congress and the states may also
propose and enact new laws and amendments to existing laws to regulate further
the consumer credit industry or to reduce finance charges or other fees or
charges applicable to consumer credit accounts. The potential effect of any such
legislation (which could affect the Subservicers) could be to reduce the
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yield on the Credit Lines. If such yield is reduced, an Amortization Event could
occur, and the Early Amortization Period would commence. See "Description of the
Securities -- Early Amortization Period". Furthermore, the Bankruptcy Code may
be amended which could alter the delinquency, charge off and revenue experience
of the Portfolio. It is uncertain at this time whether any such amendments would
cause an increase or decrease in delinquency, charge-off and revenue experience
set forth on pages 33 and 34 herein.
"DUE-ON-SALE" CLAUSES
All of the Personal Homeowner Credit Line Agreements contain due-on-sale
clauses. These clauses permit the related Subservicer to accelerate the maturity
of the loan on notice if the borrower sells, transfers or conveys an interest in
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, sec. 341 of the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibit the enforcement of many
due-on-sale clauses and permits lenders to enforce most of these clauses in
accordance with their terms, subject to certain limited exceptions.
Exempted from the general rule of enforceability of due-on-sale clauses are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made during the period beginning on the
date a state, by statute or final appellate court decision having statewide
effect, prohibited the exercise of due-on-sale clauses and ending October 15,
1982 ("Window Period Loans"). However, this exception applies only to transfers
of property which secure Window Period Loans occurring between October 15, 1982
and October 15, 1985 and does not restrict enforcement of a due-on-sale clause
in connection with transfers of property which secure Window Period Loans
occurring after October 15, 1985 unless the property which secures such Window
Period Loans is located in one of the five states identified below.
Therefore, most standard due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
after October 15, 1982 to restrict the enforceability of such clauses with
respect to mortgage loans that were (i) originated or assumed after the date a
state prohibited enforcement of due-on-sale clauses and before October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. The Federal Home Loan Mortgage
Corporation has taken the position in its published mortgaged servicing
standards that five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intrafamily transfers, certain transfers by
operation of law, leases of fewer than three years with no option to purchase,
and the creation of a junior encumbrance.
To the extent a Subservicer becomes aware of a conveyance of a borrower's
interest in a property securing a Personal Homeowner Credit Line, if the
Subservicer is unable to establish a new credit line with the borrower to prepay
the Personal Homeowner Credit Line, the Subservicer generally will enforce the
due-on-sale clause to the extent permissible by law.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have the priority over all subsequent liens on the property
and, in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is uncertain whether they would be
imposed on a secured lender (such as the Deposit Trust). In the event that title
to a property securing a Personal Homeowner Credit Line was acquired on behalf
of the Deposit Trust and cleanup costs were incurred in respect of the property,
the Securityholders may incur a loss if such costs were required to be paid by
the Deposit Trust.
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CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
GENERAL
Set forth below is a discussion of the anticipated material United States
federal and state income tax consequences of the purchase, ownership and
disposition of the Notes offered hereunder. This discussion is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury regulations thereunder, the laws of
various states, current administrative rulings, judicial decisions and other
applicable authorities. There are no cases or Internal Revenue Service ("IRS")
rulings on similar transactions involving both debt and equity interests issued
by a trust with terms similar to those of the Series 1997-2 Securities. As a
result, there can be no assurance that the IRS will not challenge the
conclusions reached herein, and no ruling from the IRS has been or will be
sought on any of the issues discussed below. Furthermore, legislative, judicial
or administrative changes may occur, perhaps with retroactive effect, which
could affect the accuracy of the statements and conclusions set forth herein as
well as the tax consequences to Noteholders.
This discussion is directed to prospective purchasers who purchase Notes in
the initial distribution thereof, including corporations and partnerships, and
who hold the Notes as "capital assets" within the meaning of Section 1221 of the
Code. It does not purport to deal with all aspects of federal income taxation
that may be relevant to the Noteholders in light of their personal investment
circumstances nor, except for certain limited discussion of particular topics,
to certain types of holders subject to special treatment under the federal
income tax laws (e.g., financial institutions, broker-dealers, life insurance
companies and tax-exempt organizations). ACCORDINGLY, PROSPECTIVE INVESTORS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL,
FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SECURITIES.
TAX CHARACTERIZATION OF THE DEPOSIT TRUST AND THE ISSUER
With respect to each series of Notes, Katten Muchin & Zavis, special
counsel to the Seller ("Tax Counsel"), has opined that for federal income tax
purposes, neither the Deposit Trust nor the Issuer will be (i) classified as an
association taxable as a corporation or (ii) subject to corporate taxation under
the rules governing publicly traded partnerships. This opinion is based upon,
among other things, the assumption that the terms of the trust agreements for
the Deposit Trust and the Issuer and related agreements will be complied with in
all material respects.
Tax Counsel's opinions are not binding upon the IRS. If the Deposit Trust
were taxable as a corporation for income tax purposes, the income from the
Receivables would be subject to federal and state taxation at the highest
marginal rates for corporations, probably with no offset for distributions to
the Seller or the Issuer. If the Issuer were also to be taxable as a
corporation, it might be able to reduce its taxable income on distributions of
earnings from the Deposit Trust by its interest expense on the Notes and the
dividend received deduction. However, the overall effect of such
recharacterization of the Deposit Trust and the Issuer would be to reduce
materially the cash available to make payments due on the Notes.
Under Code Section 7704, a "publicly traded partnership" is subject to
taxation as a corporation unless substantially all its income falls within
certain categories. In 1988, the Treasury issued Notice 88-75 containing
guidelines for the disposition of partnership interests which, if followed,
prevent the IRS from characterizing a partnership as "publicly traded" and
thereby subjecting it to taxation as a corporation. In 1995, the Treasury
promulgated regulations under Section 7704 which supersede Notice 88-75 with
respect to the Issuer immediately, and with respect to the Deposit Trust after
2005. The trust agreements for the Deposit Trust and the Issuer contain
restrictions on the conditions for investing in and disposing of beneficial
interests that meet the applicable guidelines and regulations. The trust
agreements also further authorize the Seller to modify the terms for the
disposition of beneficial interests in the Deposit Trust and the Issuer if
necessary or advisable for compliance with any subsequent governmental
regulations, rulings or notices, and any judicial decisions, affecting the
characterization of a partnership as "publicly traded."
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When asset-backed securities are issued in two or more classes by any
entity substantially all of whose assets consist of debt obligations, the entity
will be subject to the "taxable mortgage pool" rules of Code Section 7701(i) if,
among other factors, more than 50% of the debt obligations it holds at the time
of issuance of the asset-backed securities consist of loans secured by interests
in real estate. A taxable mortgage pool is subject to taxation as a corporation.
The Pooling and Servicing Agreement prohibits the Deposit Trust from acquiring
Receivables secured by liens on real estate if such acquisition would cause the
tax basis of such Receivables to amount to 45% or more of the aggregate tax
bases of all Receivables held directly and beneficially by the Deposit Trust and
to obtain an opinion of tax counsel prior to the issuance of any new Series
Participation or other asset-backed securities that such action will not cause
the Deposit Trust, the Issuer or any portion of either to be a taxable mortgage
pool.
The IRS has adopted so-called "check-the-box" regulations which permit the
Deposit Trust and the Issuer to be treated as a partnership for federal income
tax purposes, even if such trusts had the characteristics of an association
taxable as a corporation under prior law, such as (i) limited liability for the
Seller and (ii) continuity of life notwithstanding an Insolvency Event affecting
the Seller. In the event such regulations or their equivalent are adopted at
state levels as well, the Pooling and Servicing Agreement and the Trust
Agreement may be amended by the Seller and the Trustee thereof to permit those
corporate attributes.
THE NOTES
Characterization as Debt. With respect to each class of Class A Notes, Tax
Counsel has opined that, although no specific authority exists with respect to
the characterization for federal income tax purposes of securities having the
same terms as the Notes, the Notes will be treated as debt for federal income
tax purposes. The Issuer, the Seller and each Noteholder, by acquiring an
interest in a Note, will agree to treat the Notes as indebtedness for federal,
state and local income and franchise tax purposes.
Interest Income to Noteholders. If the Notes are treated as indebtedness
for federal income tax purposes, then interest on the Notes will be taxable as
ordinary income for Federal income tax purposes when received by Noteholders
utilizing the cash method of accounting and when accrued by Noteholders
utilizing the accrual method of accounting. Interest received on the Notes may
constitute "investment income" for purposes of certain limitations of the Code
concerning the deductibility of investment interest expense.
Original Issue Discount, Market Discount and Premium. It is not anticipated
that any series of Notes will be issued at a greater than de minimis discount (a
yield to the stated or expected maturity of less than .25% per year). However,
even if a Note has OID falling within the de minimis exception, the holder must
include such OID in income proportionately as principal payments are made on
such Note. A holder who purchases a Note after the initial distribution thereof
at a discount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the bond premium amortization rules of the
Code.
Disposition of Notes. 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 the Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount and gain previously
included by such Noteholder in income with respect to the Note and decreased by
any bond premium previously amortized and any principal payments previously
received by such Noteholder with respect to such Note. Subject to the market
discount rules of the Code, any such gain or loss will be capital gain or loss
if the Note was held as a capital asset. Under recent legislation, capital gain
will be long-term if the Note was held by the holder for more than 18 months,
mid-term gain if held for more than one year but not more than 18 months, and
otherwise will be short-term. Any capital losses realized generally may be used
by a corporate taxpayer only to offset capital gains, and by an individual
taxpayer only to the extent of capital gains plus $3,000 of other income.
The Taxpayer Relief Act of 1997 reduces the maximum rates on long-term
capital gains recognized on capital assets held by individual taxpayers for more
than 18 months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and thereafter for certain
individual taxpayers
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who meet specified conditions). Prospective investors should consult their own
tax advisors concerning these tax law changes.
Tax Consequences to Foreign Noteholders. Notes will be issued in registered
form. If interest paid (or accrued) to a Noteholder who is a nonresident alien,
foreign corporation or other non-United States person (a "foreign person") is
not effectively connected with the conduct of a trade or business within the
United States by the foreign person, the interest generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, as long as the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Issuer (including a
direct or indirect holder of 10% or more of the applicable outstanding
Certificates or of the Seller's stock) or a "controlled foreign corporation"
with respect to which the Issuer is a "related person" within the meaning of the
Code, and (ii) provides to the Issuer or its paying agent an appropriate
statement on IRS Form W-8 or its substantial equivalent, signed under penalties
of perjury, certifying that the beneficial owner of the Note is a foreign person
and providing that foreign person's name and address. (Investors who hold their
Notes through Participants, indirect participants or other nominees must provide
their certifications to such nominee.) If the information provided in this
statement changes, the foreign person must so inform the Issuer within 30 days
of such change. The statement generally must be provided in the year a payment
occurs or in either of the two preceding years, and therefore must be renewed
triennially. If such interest were not portfolio interest, then it would be
subject to United States federal income and withholding tax at a rate of 30
percent unless such tax is reduced or eliminated pursuant to an applicable tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person, and (ii) in the case of an individual, the foreign
person is not present in the United States for 183 days or more in the taxable
year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person, the holder (although exempt from the withholding
tax previously discussed if an appropriate statement is furnished) generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the foreign person
is a foreign corporation, it may be subject to a branch profits tax equal to 30
percent of its "effectively connected earnings and profits" within the meaning
of the Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable tax treaty.
Information Reporting and Backup Withholding. The Issuer will be required
to report annually to the IRS, and to each related Noteholder of record, the
amount of interest paid on the Notes (and the amount of interest withheld for
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, corporations, tax-exempt organizations, qualified pension
and profit-sharing trusts, and individual retirement accounts). Each holder
(other than holders who are not subject to the reporting requirements, or
foreign persons who provide certification as to their status as described above)
will be required to provide to the Issuer, under penalties of perjury, a
certificate on IRS Form W-9 or its equivalent 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 Issuer will be required to withhold,
from interest and OID otherwise payable to the holder, 31% of such amounts and
remit the withheld amounts to the IRS as a credit against the holder's federal
income tax liability. Such Noteholders will receive payments without gross up
for amounts withheld and neither the Issuer, Seller, Servicer, Indenture Trustee
or any other party will have an obligation to pay a Noteholder any additional
amount due to the imposition of any withholding tax. If the holder of record of
Notes is CEDE, as nominee for DTC, Noteholders and the IRS will receive tax and
other information only from Participants and indirect participants rather than
from the Issuer. Similarly, investors who hold their Notes through a
Participant, indirect participant or other nominee must provide their
certifications to such nominee.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information
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reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New Regulations
will generally be effective for payments made after December 31, 1998, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
STATE AND LOCAL INCOME AND FRANCHISE TAX CONSEQUENCES
Taxation of the Deposit Trust and the Issuer. Some states in which obligors
are located or the Deposit Trust conducts its collection activities may impose
an income or franchise tax on the Deposit Trust or on the Issuer,
notwithstanding their avoidance of taxation as a corporation for federal income
tax purposes. Such taxes are not now material, but are subject to change at any
time. As to the consequences under state law of the Deposit Trust or the Issuer
being taxable as a corporation, see "Tax Characterization of The Deposit Trust
and The Issuer", above.
Taxation of Note Owners. If, in accordance with the opinion of Tax Counsel,
the Notes are characterized as indebtedness for federal income tax purposes,
Note Owners that are subject to taxation generally will be taxed on the income
and gain realized from their Notes in the locality of their commercial domicile
or residence, as applicable. Prospective investors should consult with their own
tax advisors as to the state and local income and franchise tax consequences of
an investment in the Notes.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Code Section 4975 impose certain restrictions on employee benefit plans
subject to ERISA or plans or arrangements subject to Code Section 4975 (a
"Plan") and on persons who are parties in interest or disqualified persons
("party in interest") with respect to such a Plan. In addition, ERISA imposes a
fiduciary duty on any person who is considered to be a fiduciary (as defined in
ERISA) with respect to a Plan ("fiduciary"). Certain employee benefit plans,
such as governmental plans and church plans (if no election has been made under
Code Section 410(d)), are not subject to the restrictions of ERISA, and assets
of such plans may be invested in the Notes without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any such governmental or church plan which is qualified under Code
Section 401(a) and exempt from taxation under Code Section 501(a) is subject to
the prohibited transaction rules set forth in Code Section 503. Investments by a
Plan are also subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement that
a Plan's investments be made in accordance with the documents governing the
Plan. ANY PLAN FIDUCIARY WHICH PROPOSES TO CAUSE A PLAN TO ACQUIRE ANY OF THE
NOTES SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT TO THE POTENTIAL CONSEQUENCES
UNDER ERISA, AND THE CODE, OF THE PLAN'S ACQUISITION AND OWNERSHIP OF THE NOTES.
PROHIBITED TRANSACTIONS AND FIDUCIARY DUTY
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain direct or indirect transactions (including loans) or
self-dealing transactions ("prohibited transaction") involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Code Section 4975 imposes certain excise taxes (or, in some cases,
a civil penalty may be assessed against a fiduciary pursuant to Section 502(i)
and 502(l) of ERISA) on parties in interest which engage in similar non-exempt
prohibited transactions. Section 409 of ERISA imposes personal liability upon a
fiduciary who breaches a fiduciary duty with respect to a Plan. With respect to
the assets of the Issuer, it is not anticipated that there will be any
transaction which is a prohibited transaction with a party in interest with
respect to a Noteholder who is a Plan for the reasons discussed below under the
"Plan Asset Regulation."
In addition, the acquisition or holding of Notes by or on behalf of a Plan
would in some circumstances be considered to give rise to a prohibited
transaction or a breach of a fiduciary duty (1) if the Seller, the Issuer, the
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applicable Trustee, the Servicer, the Underwriter, or any of their respective
affiliates is or becomes a fiduciary or party in interest with respect to such
Plan; or (2) if the sponsor of such Plan is a Certificateholder or intends to
purchase any Certificate. Certain exemptions from the prohibited transaction
rules granted by the U.S. Department of Labor could be applicable to the
purchase and holding of Notes by a Plan depending on the type and circumstances
of the plan fiduciary making the decision to acquire such Notes. Included among
these exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1,
regarding investments by insurance company pooled separate accounts; PTCE 91-38,
regarding investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by "qualified professional asset managers;" PTCE 75-1,
regarding investments in principal transactions and during underwritings, PTCE
95-60, regarding transactions involving insurance company general accounts; and
PTCE 96-23, regarding transactions effected by an "in-house asset manager."
Moreover, in Public Law 104-188, ERISA was amended to provide interim relief
from Part 4 of ERISA and Code Section 4975 with respect to most claims that the
assets contained in a general account of an insurance company constitute assets
of a Plan. Neither the Issuer nor Katten Muchin & Zavis ("ERISA Counsel")
expresses any opinion as to the applicability of any of the above exemptions or
interim relief to the acquisition of or holding of Notes by a Plan.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions (the "Plan Asset
Regulation"). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be subject
to regulation by ERISA ("plan assets") such that any person who exercises
control over such plan assets would be subject to ERISA's fiduciary standards
and transactions involving such assets would be subject to the prohibited
transaction rules. Under the Plan Asset Regulation, generally when a Plan
invests in another entity, the Plan's assets do not include, solely by reason of
such investment, any of the underlying assets of the entity. However, the Plan
Asset Regulation provides that, if a Plan acquires an "equity interest" in an
entity that is neither a "publicly-offered security" (as defined therein) nor a
security issued by an investment company registered under the Investment Company
Act of 1940, the assets of the entity will be treated as assets of the Plan
investor and thus plan assets unless certain exceptions apply. If the Notes were
deemed to be equity interests and no statutory, regulatory or administrative
exemption applies, the Issuer could be considered to hold plan assets by reason
of a Plan's investment in the Notes. Such plan assets would include an undivided
interest in any assets held by the Issuer. In such an event, the Trustee,
Seller, Servicer, Underwriter and other persons, in providing services with
respect to the Issuer's assets, may be a fiduciary or a party in interest with
respect to such Plan, subject to the fiduciary responsibility provisions of
ERISA, and the prohibited transaction provisions of Section 406 of ERISA and the
Code, with respect to transactions involving the Issuer's assets. Under the Plan
Asset Regulation, the term "equity interest" is defined as any interest in an
entity other than an instrument that is treated as indebtedness under
"applicable local law" and which has no "substantial equity features." Although
the Plan Assets Regulation is silent with respect to the question of which law
constitutes "applicable local law" for this purpose, Labor has stated that these
determinations should be made under the state law governing interpretation of
the instrument in question. In the preamble to the Plan Assets Regulation, Labor
declined to provide a precise definition of what features are equity features or
the circumstances under which such features would be considered "substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect provision
of investment management services. ERISA Counsel has rendered its opinion that
the Class A Notes, based upon the plain language of the Plan Assets Regulation,
will be classified as indebtedness, under the laws of the State of New York
governing indebtedness, without substantial equity features for ERISA purposes.
ERISA Counsel's opinion is based upon the terms of the Class A Notes, its
opinion as Tax Counsel that the Class A Notes will be classified as debt
instruments for federal income tax purposes, the ratings which have been
assigned to the Notes, and the collateral securing the Class A Notes. However,
if contrary to ERISA Counsel's opinion the Class A Notes are not deemed to be
indebtedness without substantial equity features and no statutory, regulatory or
administrative exemption applies, the Issuer could be considered to hold plan
assets by reason of a Plan's investment in the Class A Notes.
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REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether (i) the
Seller, the Issuer, the applicable Trustee, the Servicer, the Underwriters or
any of their respective affiliates, is a party in interest with respect to the
Plan, (ii) the Plan's sponsor is a Certificateholder, (iii) the availability of
the exemptive relief provided in the Plan Asset Regulations and (iv) the
availability of any other prohibited transaction exemptions.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated November 7, 1997 (the "Underwriting Agreement") among the Seller, the
Subservicers, HFC and the Underwriters named below (the "Underwriters"), the
Seller has agreed to sell to the Underwriters and each of the Underwriters has
agreed to purchase, the principal amount of the Class A Notes set forth opposite
its name below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3
UNDERWRITERS NOTES NOTES NOTES
------------ ------------ ----------- -----------
<S> <C> <C> <C>
J.P. Morgan Securities Inc. ............................ $228,000,000 $12,000,000 $22,500,000
Lehman Brothers Inc. ................................... 228,000,000 12,000,000 22,500,000
Morgan Stanley & Co. Incorporated....................... 228,000,000 12,000,000 22,500,000
Salomon Brothers Inc.................................... 228,000,000 12,000,000 22,500,000
------------ ----------- -----------
Total.............................................. $912,000,000 $48,000,000 $90,000,000
============ =========== ===========
</TABLE>
The Underwriters propose to offer the Class A Notes in part directly to
purchasers at the initial public offering prices set forth on the cover page of
this Prospectus and in part to certain securities dealers at such prices less
concessions not to exceed 0.12%, 0.28% and 0.325% of the respective Security
Balance of the Class A-1, Class A-2 and Class A-3 Notes. The Underwriters may
allow, and such dealers may reallow, concessions not to exceed 0.08%, 0.20% and
0.20% of the respective Security Balance of the Class A-1, Class A-2 and Class
A-3 Notes, to certain brokers and dealers. After the Class A Notes are released
for sale to the public, the offering price and other selling terms may be varied
by the Underwriters.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise, affect the price of the
Class A Notes. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase the Class A Notes in the open market to cover syndicate shorts or
to stabilize the price of the Class A Notes. Any of these activities may
stabilize or maintain the market price of the Class A Notes above independent
market levels. The Underwriters are not required to engage in these activities,
and if commenced, such activities may be discontinued at any time.
The Seller and HFC have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL MATTERS
Certain legal matters relating to the Notes will be passed upon for the
Seller by John W. Blenke, Vice President -- Corporate Law and Assistant
Secretary of Household International, Inc., the parent company of HFC and the
Seller, and by Katten Muchin & Zavis, Chicago, Illinois, special counsel to the
Seller. Certain legal matters will be passed upon for the Underwriters by Brown
& Wood LLP, New York, New York. As of the date of this Prospectus, Mr. Blenke is
a full-time employee and an officer of Household International, Inc. and
beneficially owns, and holds options to purchase, shares of Common Stock of
Household International, Inc.
86
<PAGE> 87
ADDITIONAL INFORMATION
Application will be made to list the Class A Notes on the Luxembourg Stock
Exchange. The legal notice relating to the issue of the Class A Notes and copies
of the respective constitutional documents of the Issuer will be lodged with the
Chief Registrar of the District Court in Luxembourg ("Grettier en Chef du
Tribunal d'Arrondissement de et a Luxembourg"), where such documents may be
inspected and copies thereof obtained. The Issuer has undertaken to maintain a
paying agent in Luxembourg so long as the Class A Notes are listed on the
Luxembourg Stock Exchange.
All consents, approvals, authorizations or other orders of all regulatory
authorities required by the Issuer under applicable laws have been given for the
issue of the Class A Notes and for the Issuer to undertake and perform its
obligations under the Trust Agreement, the Indenture and the Class A Notes.
The issuance of the Class A Notes has been authorized by a resolution of
the Board of Directors of the Seller passed on October 30, 1997.
The Issuer is not involved in any litigation, arbitration or administrative
proceedings relating to claims or amounts which are material in the context of
the issuance of the Class A Notes nor, to the best of its knowledge, are any
such litigation, arbitration or administration proceedings pending or
threatened.
The Class A Notes have been accepted for clearance through Euroclear and
Cedel with common codes of 8210438, 8210446 and 8210462, for the Class A-1,
Class A-2 and Class A-3 Notes, respectively. The ISINs (International Securities
Identification Numbers) for the Class A-1, Class A-2 and Class A-3 Notes are
US441806AQ93, US441806AR76 and US441806AS59, respectively.
So long as the Class A Notes are listed on the Luxembourg Stock Exchange,
copies of the constitutional documents of the Issuer and copies of the Trust
Agreement and the Indenture may be inspected at, or may be obtained from, the
Luxembourg Paying Agent during business hours.
87
<PAGE> 88
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
1934 Act.................................................... 2
Accelerated Amortization Date............................... 11
Accelerated Principal Payment Amount........................ 16, 64
Additional Balances......................................... 9
Additional Credit Lines..................................... 26
Adjusted Security Balance................................... 64
Administration Agreement.................................... 6
Administrative Charges...................................... 29
Administrative Receivables.................................. 7
Administrator............................................... 6
Adverse Effect.............................................. 53
Aggregate Additional Credit Lines........................... 26, 51
Allocation Percentage....................................... 43
Amortization Event.......................................... 11, 67
Bankruptcy Code............................................. 24
Business Day................................................ 62
Cedel....................................................... 17
Cedel Participants.......................................... 73
Certificate Minimum Balance................................. 64
Certificate Rate............................................ 13, 65
Certificate Targeted Balance................................ 64
Certificateholders.......................................... 19
Certificates................................................ 1, 4
Class A Note Rate........................................... 12
Class A Notes............................................... Cover, 4
Class A-1 Notes............................................. 4
Class A-2 Notes............................................. 4
Class A-3 Notes............................................. 4
Class A-1 Targeted Principal Balance........................ 64
Class A-2 Targeted Principal Balance........................ 64
Class A-3 Targeted Principal Balance........................ 64
Class B Notes............................................... 4
Class B Targeted Principal Balance.......................... 64
Closing Date................................................ 13, 66
Code........................................................ 19, 81
Collection Account.......................................... 11, 55
Collection Period........................................... 11
Commission.................................................. 2
Cooperative................................................. 74
Credit Limit................................................ 29
Credit Line Agreement....................................... 35
Credit Lines................................................ 1, 6
Cut-Off Date................................................ 9
Cycle Dates................................................. 29
Defaulted Amount............................................ 9, 56
Defaulted Credit Line....................................... 9, 57
Deposit Trust............................................... 1, 5, 48
Deposit Trustee............................................. 1, 49
Depositary.................................................. 72
Depositaries................................................ 17, 72
Determination Date.......................................... 18, 62
Discount Percentage......................................... 8, 22, 54
Distribution Date........................................... 61
DTC......................................................... 2, A-1
Early Amortization Period................................... 11, 67
</TABLE>
88
<PAGE> 89
Eligible Account............................................ 55
Eligible Credit Line........................................ 27
Eligible Receivable......................................... 51
ERISA....................................................... 19, 84
ERISA Counsel............................................... 85
Euroclear................................................... 17
Euroclear Operator.......................................... 74
Euroclear Participants...................................... 74
Events of Default........................................... 68
Fiduciary................................................... 84
Final Payment Date.......................................... 13
Finance Charge and Administrative Receivables............... 7
Finance Charge Receivables.................................. 7
Fixed Allocation Percentage................................. 56
Fixed Rate Credit Line...................................... 30
Floating Allocation Percentage.............................. 56
Garn St. Germaine........................................... 80
Global Securities........................................... A-1
HFC......................................................... 5
Holders..................................................... 18
Indenture................................................... 1, 4
Indenture Trustee........................................... 1, 4
Index Rate.................................................. 30
indirect participants....................................... 73
Ineligible Receivables...................................... 51
Initial Credit Lines........................................ 7
Initial Cut-Off Date........................................ 6
Initial Issuance Date....................................... 6
Initial Overcollateralization Amount........................ 16, 66
Initial Overcollateralization Percentage.................... 16, 66
Initial Receivables......................................... 7
Initial Series 1997-2 Participation Invested Amount......... 9, 43, 49
Insolvency Event............................................ 23, 79
Interest Collections........................................ 11, 55
Interest Period............................................. 13, 66
IRS......................................................... 81
Issuer...................................................... 1, 4
Labor....................................................... 85
LIBOR....................................................... 12, 66
LIBOR Business Day.......................................... 66
Loan Rate................................................... 30
Luxembourg Paying Agent..................................... 75
Margin...................................................... 30
Minimum Monthly Payment..................................... 29
Minimum Principal Amount.................................... 61
Minimum Security Balance.................................... 64
Moody's..................................................... 55
Net Charge-Off.............................................. 64
Net Principal Collections................................... 10, 43, 56
New Credit Lines............................................ 26
Note Owners................................................. 2, 17
Note Rate................................................... 12, 65
Noteholders................................................. 18, 62
Notes....................................................... 1
Optimum Monthly Principal................................... 64
Overcollateralization Amount................................ 16, 65, 67
Owner Trustee............................................... 1
89
<PAGE> 90
Participants................................................ 73
Participation Pass-Through Rate............................. 12, 61
Party in interest........................................... 84
Paying Agent................................................ 68
Payment Account............................................. 62
Payment Date................................................ 1, 12, 62
Personal Homeowner Credit Lines............................. 28
Personal Unsecured Credit Lines............................. 28
Plan........................................................ 19, 84
Plan Asset Regulation....................................... 85
plan assets................................................. 85
Pool Balance................................................ 9, 56
Pooling and Servicing Agreement............................. 5
Portfolio................................................... 6
Preferred Stock............................................. 5, 49
Prime Rate.................................................. 61
Principal Balance........................................... 9, 56
Principal Collections....................................... 11, 56
Principal Discount.......................................... 8
Principal Receivables....................................... 7
prohibited transaction...................................... 84
PTCE........................................................ 85
Rating Agency............................................... 24
Rating Agency Condition..................................... 26
Receivables................................................. 7
Receivables Purchase Agreement.............................. 6
Recency Charge-off Policy................................... 31
Record Date................................................. 18, 62
Recoveries.................................................. 32, 56
Reference Bank Rate......................................... 66
Removal Notice.............................................. 54
Removed Credit Lines........................................ 7
Replacement Notes........................................... 74
Reversals................................................... 65
Rules....................................................... 73
Security Balance............................................ 65
Securityholders............................................. 58
Seller...................................................... 1, 5, 53
Seller's Bankruptcy Initiatives............................. 49
Seller's Interest........................................... 5, 50
Seller's Trust Amount....................................... 52
Series...................................................... 5
Series Enhancement.......................................... 17
Series Participation Interest............................... 5
Series 1997-2 Cut-Off Date.................................. 8
Series 1997-2 Participation................................. 1, 5
Series 1997-2 Participation Interest Distribution Amount.... 12
Series 1997-2 Participation Invested Amount................. 9, 43, 50
Series 1997-2 Participation Principal Distribution Amount... 12, 50
Series 1997-2 Securities.................................... 1
Series 1997-2 Supplement.................................... 49
Servicer.................................................... 1, 5
Servicer Credit Facility.................................... 55
Servicer Defaults........................................... 58
Servicing Fee............................................... 18, 57
Servicing Guidelines........................................ 31
Standard & Poor's........................................... 55
90
<PAGE> 91
Subservicer................................................. 6
Supplemental Certificate.................................... 53
Tax Counsel................................................. 81
Telerate Screen Page 3750................................... 66
Terms and Conditions........................................ 74
Transfer Price.............................................. 52
Trust Agreement............................................. 1, 4
Trust Assets................................................ 5
UCC......................................................... 23
Underwriters................................................ 86
Underwriting Agreement...................................... 86
Variable Rate Credit Lines.................................. 30
Window Period Loans......................................... 80
91
<PAGE> 92
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Household
Consumer Loan Asset Backed Notes, Series 1997-2 (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through any of The Depository Trust Company ("DTC"),
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset backed issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior asset backed issues. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior asset
backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case
A-1
<PAGE> 93
may be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of (i) the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of (i) the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be backed-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail
A-2
<PAGE> 94
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons and otherwise meet the conditions for
receiving "portfolio interest" can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owners of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust subject to the primary jurisdiction of
a U.S. court and having one or more U.S. fiduciaries with authority to control
all substantial decisions. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
A-3
<PAGE> 95
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
ANNEX II
PRIOR ISSUANCE OF SERIES PARTICIPATION INTERESTS
The Deposit Trust has previously issued the four Series Participation
Interests listed below. The table below sets forth the characteristics of each
of these Participations. For more specific information with respect to these
Series Participation Interests, prospective investors should contact the
Servicer.
SERIES 1995-1 PARTICIPATION
Issuance Date: September 28, 1995
Initial Series 1995-1 Participation Invested Amount: $1,000,000,000
Minimum Participation Pass-Through Rate: Prime Rate, less 1.50%
SERIES 1996-1 PARTICIPATION
Issuance Date: March 26, 1996
Initial Series 1996-1 Participation Invested Amount: $840,000,000
Minimum Participation Pass-Through Rate: Prime Rate, less 1.50%
SERIES 1996-2 PARTICIPATION
Issuance Date: August 26, 1996
Initial Series 1996-2 Participation Invested Amount: $1,044,800,000
Minimum Participation Pass-Through Rate: Prime Rate, less 1.50%.
SERIES 1997-1 PARTICIPATION
Issuance Date: March 13, 1997
Initial Series 1997-1 Participation Invested Amount: $960,000,000
Minimum Participation Pass-Through Rate: Prime Rate, less 1.50%.
SERIES 1997-A PARTICIPATION
Issuance Date: June 25, 1997
Series 1997-A Participation Invested Amount: Up to a maximum of $1,234,568,000
Aggregate Participation Certificate Rate: Floating Rate
A-4
<PAGE> 96
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLER, HFC OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
SELLER, HFC OR THE ISSUER SINCE SUCH DATE.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Incorporation of Certain Documents by
Reference............................. 2
Financial Information................... 2
Reports to the Noteholders.............. 2
Table of Contents....................... 3
Prospectus Summary...................... 4
Risk Factors............................ 21
Deposit Trust Risk Factors.............. 25
The Seller and Subservicers............. 27
The Servicer............................ 27
Use of Proceeds......................... 28
The HFC Revolving Consumer Credit
Lines................................. 28
The Revolving Consumer Credit Lines..... 35
The Series 1997-2 Participation......... 43
Maturity and Prepayment
Considerations........................ 44
Description of the Deposit Trust........ 48
Description of the Securities........... 61
Description of the Receivables Purchase
Agreement............................. 75
Certain Legal Aspects of the
Receivables........................... 77
Certain Federal and State Income Tax
Consequences.......................... 81
ERISA Considerations.................... 84
Underwriting............................ 86
Legal Matters........................... 86
Additional Information.................. 87
Index of Defined Terms.................. 88
Global Clearance, Settlement and Tax
Documentation Procedures.............. A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE CLASS A NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
$912,000,000
CLASS A-1 NOTES
$48,000,000
CLASS A-2 NOTES
$90,000,000
CLASS A-3 NOTES
HOUSEHOLD CONSUMER
LOAN TRUST 1997-2
HOUSEHOLD CONSUMER LOAN
ASSET BACKED NOTES,
SERIES 1997-2
HOUSEHOLD FINANCE
CORPORATION
SERVICER
- --------------------
PROSPECTUS
November 7, 1997
- --------------------
J.P. MORGAN & CO.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SALOMON BROTHERS INC
======================================================
