The foregoing tables have been prepared on the basis of the assumptions described above under “Weighted Average Lives of the Notes” (including the assumptions regarding the characteristics and performance of the Receivables, which will differ from the actual characteristics and performance of the Receivables), and should be read in conjunction therewith.
POOL FACTORS AND TRADING INFORMATION
The “Pool Factor” with respect to any class of Notes will be a seven-digit decimal indicating the principal amount of such class of Notes as of the close of business on the Payment Date in such month as a fraction of the respective principal amount thereof as of the Closing Date. The Servicer will compute each Pool Factor each month. Each Pool Factor will initially be 1.0000000 and thereafter will decline to reflect reductions in the principal amount of each class of Notes. Each such principal amount will be computed by allocating payments in respect of the Receivables to principal and interest using the simple interest method. The portion of the principal amount of any class of Notes for a given month allocable to a Noteholder can be determined by multiplying the original denomination of the holder’s Note by the related Pool Factor for that month.
DESCRIPTION OF THE NOTES
General
The Notes will be issued pursuant to the terms of the Indenture, a form of which has been filed as an exhibit to the Registration Statement. A copy of the Indenture will be filed as an exhibit to a current report on Form 8-K with the SEC. The following summary describes certain terms of the Notes and the Indenture. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Notes and the Indenture.
Payments of Interest
General. Interest on the principal amounts of the Notes will accrue at the respective per annum interest rates described on the front cover of this prospectus (each, an “Interest Rate”) and will be payable to the related Noteholders monthly on the 15th of each month (or, if such date is not a Business Day, on the next succeeding Business Day) (each such date, a “Payment Date”) commencing on October 15, 2021. A “Business Day” is any day except (i) a Saturday or Sunday or (ii) a day on which banks in New York, New York or Wilmington, Delaware are closed. Interest accrued as of any Payment Date but not paid on such Payment Date will be due on the next Payment Date, together with interest on such amount at the applicable Interest Rate (to the extent lawful).
Interest will accrue for the period (i) with respect to the Class A-1 Notes, from and including the Closing Date (in the case of the first Payment Date) or from and including the most recent Payment Date on which interest has been paid to but excluding the following Payment Date and (ii) with respect to the Notes (other than the Class A-1 Notes), from and including the Closing Date (in the case of the first Payment Date) or from and including the 15th day of the most recent calendar month during which interest was paid preceding each Payment Date to but excluding the 15th day of the following calendar month (each an “Interest Period”).
Interest payments on all classes of Class A Notes will have the same priority and will be subordinated to the Total Servicing Fee (which includes any Supplemental Servicing Fee) due to the Servicer and payment or reimbursement of fees, expenses and indemnification amounts required to be paid to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer (which fees, expenses and indemnification amounts may not exceed an aggregate amount equal to $300,000 in any calendar year). Interest payments on the Class B Notes will be subordinated to (i) the Total Servicing Fee (which includes any Supplemental Servicing Fee) due to the Servicer and payment or reimbursement of fees, expenses and indemnification amounts required to be paid to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer (which fees, expenses and indemnification amounts may not exceed an aggregate amount equal to $300,000 in any calendar year, (ii) interest payments on the Class A Notes and (iii) the First Priority Principal Distribution Amount. For additional information, you should refer to “Payments to Noteholders” in this prospectus.
Under certain circumstances, the amount available for interest payments on the Notes could be less than the amount of interest payable on such class of Notes. In such case, with respect to the Class A Notes, each class of Class A Noteholders will receive their pro-rata share (based upon the aggregate amount of such amounts due to such
class of Noteholders) of the aggregate amount available to be paid in respect of interest on the Class A Notes on such Payment Date. For additional information, you should refer to “Payments to Noteholders—Credit and Cash Flow Enhancement” and “Transfer and Servicing Agreements—Payments” in this prospectus.
An Event of Default will occur if the full amount of interest due on any Controlling Class is not paid within five Business Days of the related Payment Date. Upon such an Event of Default, the Indenture Trustee may accelerate the maturity of the Notes and take actions to liquidate the assets of the Issuing Entity and funds on deposit in the accounts of the Issuing Entity. For additional information, you should refer to “Description of the Notes—Indenture—Events of Default; Rights Upon Event of Default” in this prospectus.
Each of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class B Notes will bear interest at the applicable fixed per annum interest rate specified on the front cover of this prospectus.
Interest on the outstanding principal amount of the Class A-1 Notes will accrue at the related interest rate during an Interest Period from (and including) the previous Payment Date to (but excluding) the next Payment Date, except that the first Interest Period for the Class A-1 Notes will be from (and including) the Closing Date to (but excluding) the initial Payment Date. Interest on the Class A-1 Notes will be calculated on the basis of the actual number of days elapsed in such Interest Period, but assuming a 360-day year.
Interest on the outstanding principal amount of the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class B Notes will accrue at the related interest rate during an Interest Period from (and including) the 15th day of the calendar month preceding a Payment Date to (but excluding) the 15th day of the calendar month in which the Payment Date occurs, except that the first Interest Period for the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class B Notes will be from (and including) the Closing Date to (but excluding) October 15, 2021. Interest on the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class B Notes for each such Interest Period will be computed on the basis of a 360-day year consisting of twelve 30-day months, irrespective of how many days are actually in that Interest Period.
Payments of Principal
Principal payments will be made to the Noteholders on each Payment Date commencing on October 15, 2021. Payments of interest on the Notes will generally be made prior to payments of principal. For additional information, you should refer to “Payments to Noteholders” in this prospectus.
On each Payment Date, except after an Event of Default resulting in the acceleration of the Notes, from the amounts allocated to the Noteholders to pay principal described in clauses (4), (6) and (8) under “Payments to Noteholders—Priority of Payments” in this prospectus, the Issuing Entity will pay principal of each class of Notes in the following order of priority:
| (1) | to the Class A-1 Notes until the principal amount of the Class A-1 Notes is reduced to zero; then |
| (2) | to the Class A-2 Notes, until the principal amount of the Class A-2 Notes is reduced to zero; then |
| (3) | to the Class A-3 Notes until the principal amount of the Class A-3 Notes is reduced to zero; then |
| (4) | to the Class A-4 Notes until the principal amount of the Class A-4 Notes is reduced to zero; and then |
| (5) | to the Class B Notes until the principal amount of the Class B Notes is reduced to zero. |
If the Notes are declared to be due and payable following the occurrence of an Event of Default, the Issuing Entity will pay principal of all classes of Notes from funds allocated to the Noteholders, first, to the Class A-1 Notes until the principal amount of the Class A-1 Notes is reduced to zero, second, pro rata, based upon their respective unpaid principal amount, to the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes until the principal amount of each such class of the Notes is reduced to zero, and third, to the Class B Notes until the principal amount of the Class B Notes is reduced to zero. For additional information regarding Events of Default, you should refer to “Description of the Notes—Indenture––Events of Default, Rights Upon Event of Default” in this prospectus.
The principal amount of each class of Notes will be due on the respective Final Scheduled Payment Dates indicated on the front cover of this prospectus (the “Class A-1 Final Scheduled Payment Date,” the “Class A-2 Final Scheduled Payment Date,” the “Class A-3 Final Scheduled Payment Date,” the “Class A-4 Final Scheduled Payment Date” and the “Class B Final Scheduled Payment Date,” respectively, and each a “Final Scheduled Payment Date”). The actual date on which the aggregate outstanding principal amount of any class of Notes is paid may be earlier than the respective Final Scheduled Payment Dates described above based on a variety of factors, including those described under “Prepayment and Yield Considerations” and “Weighted Average Lives of the Notes” in this prospectus.
For additional information, you should refer to “Payments to Noteholders—Calculation of Principal Distribution Amounts” and “—Priority of Payments” in this prospectus.
Allocation of Losses
If losses on the Receivables exceed the amount of available credit enhancement, such losses will not be allocated to write down the principal amount of any class of Notes. Instead, the amount available to make payments on the Notes will be reduced to the extent of such losses. If the available credit enhancement is not sufficient to cover all amounts payable on the Notes, Notes having a later Final Scheduled Payment Date generally will bear a greater risk of loss than Notes having an earlier Final Scheduled Payment Date.
Indenture
Modification of Indenture. The Issuing Entity and the Indenture Trustee may, with the consent of the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, 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. For purposes of determining whether the Noteholders of the requisite percentage of the outstanding amount of the Controlling Class or any class of Notes have given any request, demand, authorization, direction, notice, consent, or waiver under the Indenture or other Transfer and Servicing Agreements, Notes held or owned by the Issuing Entity, any other obligor upon the Notes, TAFR LLC, TMCC or any affiliate of any of the foregoing will be disregarded and deemed not to be “outstanding,” except that, in determining whether the Indenture Trustee will be protected in relying upon any such request, demand, authorization, direction, notice, consent, or waiver, only Notes that a Trust Officer of the Indenture Trustee actually knows to be so owned will be so disregarded.
The Issuing Entity and the Indenture Trustee may also enter into supplemental indentures with prior notice to the rating agencies engaged by TMCC to rate the Notes (each, a “Rating Agency”) and without obtaining the consent of the Securityholders, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of such Noteholders; provided, that either (i) an officer’s certificate has been delivered by the Servicer to the Owner Trustee and the Indenture Trustee certifying that such officer reasonably believes that such supplemental indenture will not materially and adversely affect the interest of any such Noteholder or (ii) the Rating Agency Condition with respect to such supplemental indenture has been satisfied. “Rating Agency Condition” means with respect to each Rating Agency and any event or circumstance or proposed amendment or supplement to a Transfer and Servicing Agreement, the satisfaction of either of the following conditions, according to the then-current policies of such Rating Agency: (a) receipt by the Indenture Trustee of written confirmation from such Rating Agency (which, for the avoidance of doubt and without limitation, may be in the form of a letter, a press release or other publication, or a change in such Rating Agency’s published rating criteria to this effect) that such event or circumstance or proposed amendment or supplement will not result in the reduction or withdrawal by such Rating Agency of any rating it currently has assigned to any of the Class A Notes or (b) that such Rating Agency has been given notice of such event or circumstance or proposed amendment or supplement at least ten (10) days (or such lesser number of days acceptable to such Rating Agency) prior to the occurrence of such event or circumstance or proposed amendment or supplement and such Rating Agency has not notified the Indenture Trustee that such event or circumstance or proposed amendment or supplement might or would result in the reduction or withdrawal of the rating it has currently has assigned to any of the Class A Notes.
Additionally, the Issuing Entity and the Indenture Trustee may also enter into supplemental indentures, without obtaining the consent of the Securityholders, but with prior notice to the Rating Agencies, for the purpose of, among other things, correcting or amplifying the description of the collateral, conforming the provisions in the
Indenture to the descriptions thereof contained in this prospectus, evidencing the assumption of the Issuing Entity’s obligations under the Indenture, the Notes and the Certificate, as applicable, by a permitted successor to the Issuing Entity, adding additional covenants of the Issuing Entity for the benefit of the Noteholders, surrendering rights of the Issuing Entity, conveying, or otherwise transferring or pledging, property to or with the Indenture Trustee, evidencing and providing for the appointment of a successor indenture trustee or adding or changing any of the provisions of the Indenture as necessary and permitted to facilitate the administration by more than one indenture trustee, and modifying, eliminating or adding to the provisions of the Indenture in order to comply with the TIA.
Subject to the terms described in the following paragraph, the Issuing Entity and the Indenture Trustee may also, with prior notice to the Rating Agencies, enter into an indenture or indentures supplemental to the indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of such indenture or of modifying in any manner the rights of the Noteholders under such indenture; provided, that holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, have consented to such amendment.
Without the consent of the holder of each such outstanding Note affected thereby, no supplemental indenture will: (i) change the due date of any installment of principal of or interest on any such Note or reduce the principal amount of any such Note, 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 such Note or any interest thereon is payable; (ii) impair the right to bring suit for the enforcement of certain provisions of the Indenture regarding payment; (iii) reduce the percentage of the aggregate amount of the outstanding Notes, the consent of the holders of which is required for any such supplemental indenture or the consent of the holders of which is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults under the Indenture and their consequences as provided for in the Indenture; (iv) modify or alter the provisions of the Indenture regarding the voting of Notes held by the Issuing Entity, any other obligor on such Notes, the Depositor, TMCC or an affiliate of any of them; (v) reduce the percentage of the aggregate outstanding amount of such Notes, the consent of the holders of which is required to direct the Indenture Trustee to sell or liquidate the Trust Estate if the proceeds of such sale would be insufficient to pay the principal amount and accrued but unpaid interest on the outstanding Notes; (vi) decrease the percentage of the aggregate outstanding principal amount of such Notes required to amend the sections of the Indenture which specify the applicable percentage of aggregate outstanding principal amount of the Notes necessary to amend the Indenture or certain other related agreements; or (vii) permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture with respect to any of the collateral for such Notes or, except as otherwise permitted or contemplated in such Indenture, terminate the lien of such Indenture on any such collateral or deprive the holder of any such Note of the security afforded by the lien of such Indenture.
Events of Default; Rights Upon Event of Default. With respect to the Notes, an event of default under the Indenture (an “Event of Default”) will consist of: (i) a default for five Business Days or more in the payment of any interest on any Note of the Controlling Class; (ii) a default in the payment of the principal of any such Note on the related Final Scheduled Payment Date; (iii) a default in the observance or performance of any covenant or agreement of the Issuing Entity made in the Indenture which materially and adversely affects interests of the Noteholders and the continuation of any such default for a period of 90 days after written notice of such default is given to the Issuing Entity by the Indenture Trustee or to the Issuing Entity and the Indenture Trustee by the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class; (iv) any representation or warranty made by the Issuing Entity in the Indenture or in any certificate delivered pursuant thereto or in connection therewith having been incorrect in a material respect as of the time made which materially and adversely affects the interests of the Noteholders, and such breach not having been cured within 60 days after written notice of such breach is given to the Issuing Entity by the Indenture Trustee or to the Issuing Entity and the Indenture Trustee by the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class; or (v) certain events of bankruptcy, insolvency, receivership or liquidation of the Issuing Entity (which, if involuntary, remains unstayed and in effect for more than 90 days).
Notwithstanding the foregoing, the amount of principal required to be paid to Noteholders under the Indenture will generally be limited to amounts available to be deposited in the Collection Account. Therefore, the failure to pay principal on a class of Notes generally will not result in the occurrence of an Event of Default until the Final Scheduled Payment Date for such class of Notes. Notwithstanding the foregoing, if a delay in or failure of performance referred to under clauses (i) through (iv) above was caused by force majeure or other similar occurrence, the grace period described in the applicable clause will be extended for a period of 30 calendar days. In addition, as described below, following the occurrence of an Event of Default (other than an Event of Default related
to the failure to make required payments) resulting in an acceleration of the maturity of the Notes, the Indenture Trustee is not required to sell the assets of the Issuing Entity (as described above under “Capitalization of the Issuing Entity” in this prospectus), and the Indenture Trustee may sell the assets of the Issuing Entity only after meeting requirements specified in the Indenture. Under those circumstances, even if the maturity of the Notes has been accelerated, there may not be any funds to pay the principal owed on the Notes.
If an Event of Default should occur and is continuing, the Indenture Trustee or holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, may declare the principal of such Notes to be immediately due and payable. Such declaration may be rescinded by the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, if:
| (i) | the Issuing Entity has paid or deposited with the Indenture Trustee a sum sufficient to pay: |
| (A) | all payments of principal of and interest on the Notes and all other amounts that would then be due on such Notes if the Event of Default giving rise to such acceleration had not occurred; and |
| (B) | all sums paid by the Indenture Trustee under the Indenture or the Owner Trustee under the Trust Agreement and the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and the Owner Trustee and their respective agents and counsel; and |
| (ii) | all Events of Default, other than the nonpayment of the principal or interest of the Notes that has become due solely by such acceleration, have been cured or waived. |
If the Notes are due and payable following an Event of Default, the Indenture Trustee may institute proceedings to collect amounts due, exercise remedies as a secured party, including foreclosure or sale of the Trust Estate or elect to have the Issuing Entity maintain possession of the Trust Estate and continue to apply proceeds from the Trust Estate as if there had been no declaration of acceleration. However, the Indenture Trustee is prohibited from selling the Trust Estate following an Event of Default, other than a default in the payment of any principal on the Final Scheduled Payment Date of a Note or a default for five Business Days or more in the payment of any interest on any Note of the Controlling Class, unless (i) the holders of all such outstanding Notes of the Controlling Class consent to such sale, (ii) the proceeds of such sale are sufficient to pay in full the principal of and the accrued interest on the outstanding Notes at the date of such sale or (iii) the Indenture Trustee determines that the proceeds of the Trust Estate would not be sufficient on an ongoing basis to make all payments on the Notes as such payments would have become due if such obligations had not been declared due and payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3% of the aggregate outstanding principal amount of such Notes of the Controlling Class. In the event of a sale of the assets of the Trust Estate by the Indenture Trustee following an Event of Default, the Noteholders will receive notice and an opportunity to submit a bid in respect of such sale.
If an Event of Default occurs and is continuing and the Indenture Trustee has actual knowledge of such Event of Default, the Indenture Trustee will be obligated to mail to each Noteholder notice of the Event of Default within 90 days of the Indenture Trustee’s discovery thereof in the case of an Event of Default in payment of principal on the Final Scheduled Payment Date of a Note or of interest on any Note of the Controlling Class, the Indenture Trustee may withhold the notice to Noteholders if and so long as a committee of its officers in good faith determines that withholding the notice is in the best interests of Noteholders.
Subject to the provisions of the Indenture relating to the duties of the Indenture Trustee, if an Event of Default occurs and is continuing, 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 such 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 Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Indenture Trustee or exercising of any trust or power conferred on the Indenture Trustee, and the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, may, in certain cases, waive any default under the Indenture except a default in (i) the deposit of collections or other required amounts, (ii) any required payment from amounts held in any Trust Account
in respect of amounts due on the Notes, (iii) payment of principal or interest or (iv) 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 such outstanding Notes of the Controlling Class.
Any Notes owned by the Depositor, the Servicer or any of their respective affiliates will be entitled to equal and proportionate benefits under the Indenture, except that such Notes, while owned by the Depositor, the Servicer or any of their respective affiliates, will not be considered to be outstanding for the purpose of determining whether the requisite percentage of Noteholders have given any request, demand, authorization, direction, notice, consent or other action under the Indenture.
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 to the Indenture Trustee written notice of a continuing Event of Default, (ii) the holders of not less than 25% in principal amount of the outstanding Notes of the Controlling Class have made written request to the Indenture Trustee to institute such proceeding in its own name, (iii) such holder or holders have offered the Indenture Trustee security or indemnity reasonably satisfactory to it, (iv) the Indenture Trustee has for 30 days failed to institute such proceeding and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 30 day period by the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class.
In addition, the Indenture Trustee and the Noteholders, by accepting the Notes, covenant that they will not at any time institute against the Issuing Entity or the Depositor any bankruptcy, reorganization or other proceeding under any federal or state bankruptcy or similar law.
With respect to the Issuing Entity, neither the Indenture Trustee nor the Owner Trustee in its individual capacity, nor any holder of the Certificate representing an ownership interest in the Issuing Entity 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 Issuing Entity contained in the Indenture.
Certain Covenants. The Indenture will provide that the Issuing Entity may not consolidate with or merge into any other entity, unless, among other things, (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 Issuing Entity’s obligation to make due and punctual payments upon the Notes and the performance or observance of every agreement and covenant of the Issuing Entity under the Indenture, (iii) no Event of Default has occurred and is continuing immediately after such merger or consolidation, (iv) the Rating Agency Condition has been satisfied with respect to such merger or consolidation and (v) the Issuing Entity has received an opinion of counsel to the effect that such consolidation or merger would have no material adverse tax consequence to the Issuing Entity or to any Securityholder.
The Issuing Entity will not, among other things, (i) except as expressly permitted by the Indenture, the Transfer and Servicing Agreements or certain related documents with respect to the Issuing Entity (collectively, the “Related Documents”), sell, transfer, exchange or otherwise dispose of any of the assets of the Issuing Entity, (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 Internal Revenue Code of 1986, as amended (the “Code”) or applicable state law) or assert any claim against any present or former holder of the Notes because of the payment of taxes levied or assessed upon the Issuing Entity, (iii) except as expressly permitted by the Related Documents, dissolve or liquidate in whole or in part, (iv) permit the validity or effectiveness of the Indenture to be impaired or permit any person to be released from any covenants or obligations with respect to the Notes under the Indenture except as may be expressly permitted thereby or (v) permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance to be created on or extend to or otherwise arise upon or burden the assets of the Issuing Entity or any part thereof, or any interest in the assets of the Issuing Entity or the proceeds thereof.
The Issuing Entity may not engage in any activity other than as specified in this prospectus. The Issuing Entity will not incur, assume or guarantee any indebtedness other than indebtedness incurred pursuant to the Notes and the Indenture or otherwise in accordance with the Related Documents.
Indenture Trustee’s Annual Report. If required by the TIA, the Indenture Trustee will be required to distribute each year to all Noteholders a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the Indenture, any amounts advanced by it under the Indenture, the amount, interest rate and maturity date of certain indebtedness owing by the Issuing Entity to the Indenture Trustee in its individual capacity, the property and funds physically held by the Indenture Trustee as such and any action taken by it that materially affects the Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. The Indenture will be discharged with respect to the collateral securing the Notes upon the delivery to the Indenture Trustee for cancellation of all such Notes or, with certain limitations, upon deposit with the Indenture Trustee of funds sufficient for the payment in full of all such Notes, including interest thereon, and any fees, expenses and indemnification amounts due and payable to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer.
Notices
Noteholders of record will be notified in writing by the Indenture Trustee of any Event of Default or termination of, or appointment of a successor to, the Servicer promptly upon a Trust Officer (as defined in the Sale and Servicing Agreement) obtaining actual knowledge thereof. While Notes are held in book-entry form, these notices will be delivered by the Indenture Trustee to The Depository Trust Company (“DTC”). If Notes are issued in definitive form, these notices will be mailed to the addresses provided to the Indenture Trustee by the holders of record as of the relevant record date. Such notices will be deemed to have been given as of the date of delivery to DTC or mailing.
Governing Law
The Indenture and Notes are governed by and will be construed in accordance with the laws of the State of New York applicable to agreements made in and to be performed wholly within such jurisdiction.
Minimum Denominations
The Class A Notes will be issued in U.S. Dollars in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof (except for one Note of each class which may be issued in a denomination other than an integral multiple of $1,000). Each class of Notes will initially be represented by one or more Notes registered in the name of the nominee of DTC (together with any successor depository selected by the Issuing Entity, the “Depository”) and will be registered in the name of Cede & Co., as the nominee of DTC, the clearing agency. Accordingly, such nominee is expected to be the holder of record of the Notes of each class. Unless and until Definitive Notes are issued under the limited circumstances described in this prospectus, no Noteholder will be entitled to receive a physical certificate representing a Note. All references in this prospectus to actions by Noteholders refer to actions taken by DTC upon instructions from its participating organizations (the “DTC Participants”) and all references in this prospectus to payments, notices, reports and statements to Noteholders refer to payments, notices, reports and statements to DTC or its nominee, as the registered holder of the Notes, for distribution to Noteholders in accordance with DTC’s procedures with respect thereto. For additional information, you should refer to “Description of the Notes—Book-Entry Registration” and “—Definitive Securities” in this prospectus.
Book-Entry Registration
General
Upon issuance, all Notes in book-entry form having the same original issue date, maturity and otherwise having identical terms and provisions will be represented by one or more fully registered global notes. Each global note will be deposited with, or on behalf of, DTC, as depository, registered in the name of DTC or a nominee of DTC.
Except as described below, a global note may not be transferred except as a whole: (1) by DTC to a nominee of DTC; (2) by a nominee of DTC to DTC or another nominee of DTC; (3) by DTC or any nominee to a successor of DTC or a nominee of the successor.
So long as DTC or its nominee is the registered owner of a global note, DTC or its nominee, as the case may be, will be the sole holder of the Notes in book-entry form represented by the global note for all purposes under the Indenture. Except as otherwise provided in this section, the actual purchasers, or “Beneficial Owners,” of the
global note or Notes representing Notes in book-entry form will not be entitled to receive physical delivery of Notes in certificated form and will not be considered to be the holders of the Notes for any purpose under the Indenture, and no global note representing Notes in book-entry form will be exchangeable or transferable. Accordingly, each person owning a beneficial interest in a global note must rely on the procedures of DTC and, if a person is not a participant, on the procedures of the participant through which the person owns its interest in order to exercise any rights of a holder under the Indenture.
We may elect to allow Beneficial Owners to hold their interest in a global note held by DTC through Clearstream Banking, société anonyme (“Clearstream”) or Euroclear Bank SA/NV, as operator of the Euroclear system (“Euroclear”), if they are participants in those systems, or indirectly through organizations that are participants in those systems. Clearstream and Euroclear will hold interests on behalf of their customers through accounts held in Clearstream’s and Euroclear’s names on the books of their respective depositaries, which in turn will hold the interests in the depositaries’ names on the books of DTC.
We understand that under existing industry practices, if we request any action of holders or if a Beneficial Owner of a global note desires to give or take any action that a holder is entitled to give or take under the Indenture, DTC would authorize the participants holding the relevant beneficial interests to give or take the desired action, and the participants would authorize Beneficial Owners owning through the participants to give or take the desired action or would otherwise act upon the instructions of Beneficial Owners. Euroclear or Clearstream, as the case may be, will take action on behalf of their participants only in accordance with its relevant rules and procedures and subject to its respective depositaries’ ability to effect such actions on its behalf through DTC.
The laws of some jurisdictions require that certain purchasers of securities take physical delivery of the securities in definitive certificated form. These limits and laws may impair the ability to transfer beneficial interests in a global note representing Notes in book-entry form. Further, because DTC can act only on behalf of its participants, who in turn act on behalf of indirect participants, the ability of Beneficial Owners to pledge their interest in the Notes to persons or entities that do not participate in the DTC system, or otherwise take action with respect to such interest, may be limited by the lack of a definitive certificate of such interest.
Settlement Procedures
The initial depository for the Notes will be DTC. The depository will act as securities depository for the Notes in book-entry form. The Notes in book-entry form will be issued as fully registered securities registered in the name of Cede & Co., the depository’s nominee or such other name as may be requested by an authorized representative of DTC. One global note will be issued to represent each $500,000,000 of aggregate principal amount of Notes of the same issue. Additional global notes will be issued to represent any remaining principal amount of the issue.
Purchases of Notes in book-entry form under DTC’s system must be made by or through direct participants, which will receive a credit for Notes in book-entry form on DTC’s records. The ownership interest of each Beneficial Owner is in turn recorded on the records of direct participants and indirect participants. Beneficial Owners of Notes in book-entry form will not receive written confirmation from DTC of their purchase, but each Beneficial Owners is expected to receive written confirmation providing details of the related transaction, as well as periodic statements of its holdings, from the direct or indirect participant through which such Beneficial Owner entered into the related transaction. Transfers of ownership interests in a global note representing Notes in book-entry form are accomplished by entries made on the books of participants acting on behalf of the Beneficial Owners. Beneficial Owners of global notes representing Notes in book-entry form will not receive Notes in certificated form representing their ownership interests in the Notes, unless use of the book-entry system for Notes in book-entry form is discontinued.
To facilitate subsequent transfers, all global notes representing Notes in book-entry form which are deposited with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of global notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the global notes representing the Notes in book-entry form; DTC’s records reflect only the identity of the direct participants to whose accounts the Notes in book-entry form are credited, which may or may not be the Beneficial Owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers and for forwarding all notices concerning the Notes to their customers.
Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants, and by direct participants and indirect participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices will be sent to DTC. If less than all of the Notes in book-entry form are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each direct participant in the issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the global notes representing the Notes in book-entry form unless authorized by a direct participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an omnibus proxy to us as soon as possible after the applicable record date. The omnibus proxy assigns Cede & Co.’s consenting or voting rights to those direct participants, identified in a listing attached to the omnibus proxy, to whose accounts the Notes in book-entry form are credited on the applicable record date.
So long as DTC, or its nominee, is a registered owner of the global notes representing the Notes in book-entry form, we will make principal and interest payments on the global notes representing the Notes in book-entry form to DTC. DTC’s practice is to credit direct participants’ accounts upon DTC’s receipt of funds and corresponding detail information from TAFR LLC or the Indenture Trustee, on the applicable Payment Date in accordance with their respective holdings shown on DTC’s records. Payments by participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of the participant and not of DTC, the Indenture Trustee or TAFR LLC, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of TAFR LLC or the Indenture Trustee. Disbursement of such payments to direct participants is the responsibility of DTC, and disbursement of payments to the Beneficial Owners is the responsibility of direct participants and indirect participants. Distributions with respect to Notes held through Clearstream or Euroclear will be credited, to the extent received by their respective depositaries, to the cash accounts of their participants in accordance with the relevant system’s rules and procedures.
DTC may discontinue providing its services as securities depository with respect to the Notes in book-entry form at any time by giving reasonable notice to TAFR LLC or the Indenture Trustee. Under these circumstances, if a successor securities depository is not obtained, Notes in certificated form are required to be printed and delivered.
We may decide (subject to the procedures of the securities depository) to discontinue use of a system of book-entry transfers through the depository or a successor securities depository. In that event, Notes in definitive certificated form will be printed and delivered.
If DTC is at any time unwilling or unable to continue as depository and a successor depository is not appointed by us within 90 days, we will issue Notes in certificated form in exchange for the Notes represented by the global notes. In addition, we may at any time and in our sole discretion determine (subject to the procedures of the securities depositary) to discontinue use of a global note and, in that event, will issue Notes in certificated form in exchange for the Notes represented by the global note. The Class A Notes will be issued in U.S. Dollars in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof (except for one Note of each class which may be issued in a denomination other than an integral multiple of $1,000) and will be issued in registered form only, without coupons.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any Notes 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 participants of DTC, or “DTC Participants.” Secondary market sales of Notes held in DTC between DTC Participants will occur in the ordinary way in accordance with DTC rules and will be settled using the procedures applicable to United States corporate debt obligations.
Trading between participants of Euroclear, or “Euroclear Participants” and/or participants of Clearstream, or “Clearstream Participants.” Secondary market sales of beneficial interests in the Notes held through Euroclear or Clearstream to purchasers that will hold beneficial interests
through Euroclear or Clearstream will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream and will be settled using the procedures applicable to conventional eurobonds.
Trading between DTC Seller and Euroclear/Clearstream Purchaser. When book-entry interests in Notes are to be transferred from the account of a DTC Participant to the account of a Euroclear or Clearstream accountholder, the purchaser must first send instructions to Euroclear or Clearstream through a participant at least one business day (European time) prior to the settlement date, in accordance with its rules and procedures and within its established deadlines (European time). Clearstream Participants and Euroclear Participants may not deliver instructions directly to DTC. Euroclear or Clearstream will then instruct its depositary to receive the Notes and make payment for them. On the settlement date, the depositary will make payment to the DTC Participant’s account and the Notes will be credited to the depositary’s account. After settlement has been completed, DTC will credit the Notes to the U.S. depositary for Euroclear or Clearstream, as the case may be. Euroclear or Clearstream will credit the Notes, in accordance with its usual procedures, to the participant’s account, and the participant will then credit the purchaser’s account. These securities credits will appear the next business day (European time) after the settlement date. The cash debit from the account of Euroclear or Clearstream will be back-valued to the value date (which will be the preceding business day (European time) if settlement occurs in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the cash debit will instead be valued at the actual settlement date. Since the settlement will occur during New York business hours, a DTC Participant selling an interest in the Notes can use its usual procedures for transferring notes to the U.S. depositary for Euroclear or Clearstream, as the case may be, for the benefit of Euroclear Participants or Clearstream Participants. The DTC seller will receive the sale proceeds on the settlement date. Thus, to the DTC seller, a cross-market sale will settle no differently than a trade between two DTC Participants.
Trading between a Euroclear or Clearstream Seller and a DTC Purchaser. Due to time zone differences in their favor, Euroclear Participants and Clearstream Participants can use their usual procedures to transfer Notes through the applicable U.S. depositary to a DTC Participant. The seller must first send instructions to Euroclear or Clearstream through a participant at least one business day (European time) prior to the settlement date. Euroclear or Clearstream will then instruct its U.S. Depositary to credit the Notes to the DTC Participant’s account and receive payment. The payment will be credited in the account of the Euroclear or Clearstream Participant on the following business day (European time), but the receipt of the cash proceeds will be back-valued to the value date (which will be the preceding business day (European time) if settlement occurs in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the receipt of the cash proceeds will instead be valued at the actual settlement date.
The Clearing Systems
DTC. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, 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 Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC Direct Participants deposit with DTC. DTC also facilitates the post-trade settlement among DTC Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between DTC Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. DTC Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a DTC Direct Participant, either directly or indirectly. The DTC Rules applicable to DTC Direct Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com.
Clearstream. Clearstream advises that it is incorporated under the laws of Luxembourg as a professional depository. Clearstream holds securities for Clearstream Participants and facilitates the clearance and settlement of
securities transactions between Clearstream Participants through electronic book-entry changes in accounts of Clearstream Participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to Clearstream Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depository in Luxembourg, Clearstream is subject to regulation by the Commission de Surveillance du Secteur Financier. Clearstream Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Clearstream is also available to other institutions such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Participant either directly or indirectly. Distributions with respect to the Notes held beneficially through Clearstream will be credited to cash accounts of Clearstream Participants in accordance with its rules and procedures, to the extent received by the U.S. Depositary for Clearstream.
Euroclear. Euroclear holds securities and book-entry interests in securities for Euroclear Participants and facilitates the clearance and settlement of securities transactions between Euroclear Participants, and between Euroclear Participants and participants of certain other securities intermediaries through electronic book-entry changes in accounts of such participants or other securities intermediaries. Euroclear provides Euroclear Participants, among other things, with safekeeping, administration, clearance and settlement, securities lending and borrowing and related services. Euroclear Participants include investment banks, securities brokers and dealers, banks, central banks, supranationals, custodians, investment managers, corporations, trust companies and certain other organizations. Non-participants in Euroclear may hold and transfer beneficial interests in a global note through accounts with a Euroclear Participant or any other securities intermediary that holds a book-entry interest in a global note through one or more securities intermediaries standing between such other securities intermediary and Euroclear. Securities clearance accounts and cash accounts with Euroclear 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. Euroclear 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 beneficially through Euroclear will be credited to the cash accounts of Euroclear Participants in accordance with the Terms and Conditions, to the extent received by the U.S. Depository for Euroclear.
Although the foregoing sets out the procedures of Euroclear, Clearstream and DTC in order to facilitate the transfers of interests in the Notes among participants of DTC, Clearstream and Euroclear, none of Euroclear, Clearstream or DTC is under any obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither we nor any agent or any paying agent, any underwriter or any affiliate of any of the above, or any person by whom any of the above is controlled for the purposes of the Securities Act of 1933, as amended (the “Securities Act”), will have any responsibility for the performance by DTC, Euroclear and Clearstream or their respective direct or indirect participants or accountholders of their respective obligations under the rules and procedures governing their operations or for the sufficiency for any purpose of the arrangements described above.
Definitive Securities
The Certificate will be issued in fully registered, certificated form (the “Definitive Certificate”). The Notes will be issued in fully registered, certificated form (the “Definitive Notes” and, together with the Definitive Certificate, the “Definitive Securities”) to Noteholders or their respective nominees, instead of to DTC or its nominee, only if (i) DTC is no longer willing or able to discharge properly its responsibilities as depository with respect to such Notes and the Administrator is unable to locate a qualified successor (and if it is the Administrator that has made such determination, the Administrator so notifies the Indenture Trustee in writing), (ii) the Depositor or the Administrator or the Indenture Trustee, as applicable, at its option, elects to terminate the book-entry system through DTC or (iii) after the occurrence of an Event of Default or a Servicer Default with respect to the Notes, holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class, advise the Indenture Trustee through DTC in writing that the continuation of a book-entry system through DTC (or a successor to DTC) with respect to the Notes is no longer in the best interest of the holders of the Notes.
Upon the occurrence of any event described in the immediately preceding paragraph, the Indenture Trustee will be required to notify all applicable Noteholders through participants of the availability of Definitive Notes. Upon surrender by DTC of the definitive certificates representing the corresponding Notes and receipt of instructions for re-registration, the Indenture Trustee will reissue such Notes as Definitive Notes to such Noteholders.
Payments of principal of, and interest on, such Definitive Notes will thereafter be made by the Indenture Trustee in accordance with the procedures described in the Indenture or the Trust Agreement, as applicable, directly to holders of Definitive Notes in whose names the Definitive Notes were registered at the close of business on the applicable Record Date. Such payments will be made by check mailed to the address of such holder as it appears on the register maintained by the Indenture Trustee. The final payment on any such Definitive Note, however, will be made only upon presentation and surrender of such Definitive Note at the office or agency specified in the notice of final payment to the applicable Noteholders. The Indenture Trustee will provide such notice to the applicable Noteholders not less than 15 or more than 30 days prior to the date on which such final payment is expected to occur.
Definitive Securities will be transferable and exchangeable at the offices of the applicable trustee or of a registrar named in a notice delivered to holders of Definitive Securities. No service charge will be imposed for any registration of transfer or exchange, but the Indenture Trustee or the Owner Trustee, as applicable, may require payment of a sum sufficient to cover any tax or other governmental charge imposed in connection therewith.
List of Securityholders
Separately from the requirement to include a request to communicate in a Form 10-D, three or more holders of the Notes or one or more holders of the Notes evidencing not less than 25% of the aggregate outstanding principal amount of the Notes may, by written request to the Indenture Trustee, obtain access to the list of all Noteholders maintained by the Indenture Trustee for the purpose of communicating directly with other Noteholders with respect to their rights under the Indenture or under the Notes. The Indenture Trustee may elect not to afford the requesting Noteholders access to the list of Noteholders if it agrees to mail the desired communication or proxy, on behalf of and at the expense of the requesting Noteholders, to all Noteholders.
The Depositor or an affiliate will be the initial Certificateholder.
The Trust Agreement and Indenture will not provide for the holding of annual or other meetings of Securityholders.
Reports to Securityholders
On or prior to each Payment Date, the Servicer will prepare and provide to the Indenture Trustee and the Owner Trustee statements to be delivered or made available to the Noteholders and Certificateholders, respectively, on such Payment Date. Each such statement to be delivered or made available to Securityholders will include (to the extent applicable) the following information as to the Notes and as to the Certificate with respect to such Payment Date or the period since the previous Payment Date, as applicable:
| • | the amount paid or distributed in respect of interest on each class of Notes; |
| • | the First Priority Principal Distribution Amount, the Second Priority Principal Distribution Amount, the Regular Principal Distribution Amount and the amount paid or distributed in respect of principal on or with respect to each Class of Notes; |
| • | the amount paid or distributed to the Certificateholders; |
| • | the number of Receivables, the Pool Balance and the Adjusted Pool Balance as of the close of business on the first day and the last day of the related Collection Period; |
| • | the aggregate outstanding principal amount and the Pool Factor for each class of Notes, before and after giving effect to all payments in respect of principal on such Payment Date; |
| • | the amount of the Servicing Fee paid to the Servicer, with respect to the related Collection Period and the amount of any unpaid Servicing Fees from the prior Payment Date; |
| • | the amount of any shortfall of interest applicable to each class of Notes after giving effect to all payments on interest on such Payment Date, and the change in such amounts from the preceding Payment Date; |
| • | the amount of fees, expenses and indemnification amounts due and payable to each of the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer, before and after giving effect to payments on such Payment Date; |
| • | the balance of the Reserve Account on such Payment Date and the Specified Reserve Account Balance for such Payment Date, before and after giving effect to changes thereto on such Payment Date; |
| • | the Yield Supplement Overcollateralization Amount for such Payment Date; |
| • | the amount of Available Collections for the related Collection Period; |
| • | delinquency and loss information with respect to the Receivables for the related Collection Period; |
| • | any material change in practices with respect to charge-offs, collection and management of delinquent Receivables, and the effect of any grace period, re-aging, re-structure, partial payments or other practices on delinquency and loss experience; |
| • | any material modifications, extensions or waivers to Receivables terms, fees, penalties or payments during the related Collection Period, or that have cumulatively become material over time; |
| • | any material breaches of representations and warranties made with respect to the Receivables, or covenants, contained in the Transfer and Servicing Agreements; and |
| • | whether a Delinquency Trigger has occurred as of the end of the related Collection Period. |
Within the prescribed period of time for tax reporting purposes after the end of each calendar year, the applicable Trustee will mail to each person who at any time during such calendar year has been a Securityholder and received any payment on the Securities held by such Person a statement containing certain information for the purposes of such Securityholder’s preparation of U.S. federal income tax returns. The Servicer will make the foregoing statements available to the Noteholder each month via its Internet website, which is presently located at http://www.toyotafinancial.com. For additional information, you should refer to “Material U.S. Federal Income Tax Considerations” in this prospectus.
The Servicer, on behalf of the Issuing Entity, will also prepare an asset-level data file with respect to the Receivables for each calendar month and file it with the SEC on Form ABS-EE before filing the related Form 10-D. The exhibits to each Form ABS-EE filed by or on behalf of the Issuing Entity after the filing of this prospectus will be incorporated by reference into the related Form 10-D. Each asset-level data file will contain detailed information concerning each Receivable, including data regarding its origination characteristics, contract terms, characteristics of the related Financed Vehicle and Obligor, contract and payment activity, servicing activity and status. Certain asset-level data, such as data related to term, collections, vehicle type, repurchases, losses on the Receivables and repossessions, may not match the aggregate data provided on the monthly statements to Securityholders as a result of differences between the methods of determining or calculating such data for the purpose of presenting the monthly statements to Securityholders and for the purpose of presenting asset-level data in Form ABS-EE.
PAYMENTS TO NOTEHOLDERS
On the second Business Day preceding each Payment Date (each, a “Determination Date”), the Servicer will inform the Owner Trustee and the Indenture Trustee of, among other things, the amount of funds collected on or in respect of the Receivables and the Servicing Fee payable to the Servicer, in each case with respect to the calendar month immediately preceding the month in which the related Payment Date occurs (the “Collection Period”). On each Determination Date, the Servicer will also inform the Owner Trustee and the Indenture Trustee of the amount of any fees, expenses and indemnification amounts required to be paid to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer on the related Payment Date. On or before each Determination Date, the Servicer will also determine the First Priority Principal Distribution Amount, the Second Priority Principal Distribution Amount, the Regular Principal Distribution Amount and, based on the Available Collections and other amounts available for distribution on the related Payment Date as described below, the amount to be distributed to the Securityholders.
The Indenture Trustee will make payments to the Noteholders out of the amounts on deposit in the Collection Account subject to the application thereof in accordance with the priorities set forth under “—Priority of Payments” below. The amounts to be distributed to the Noteholders will be determined in the manner described below.
Calculation of Available Collections
The amount of funds available for payment on a Payment Date (without taking into account amounts withdrawn from the Reserve Account, if available) (“Available Collections”) will generally be the sum (without duplication) of the following amounts with respect to the Collection Period preceding such Payment Date or, in the case of the first Payment Date, the period from the Cutoff Date through the last day of the calendar month preceding such Payment Date:
| (i) | all collections of interest and principal on or in respect of the Receivables other than Defaulted Receivables; |
| (ii) | all insurance proceeds and proceeds of the liquidation of Defaulted Receivables, net of expenses incurred by the Servicer in accordance with its Customary Servicing Practices in connection with such liquidation, including amounts received in subsequent Collection Periods as and when received; |
| (iii) | all Warranty Purchase Payments with respect to Warranty Receivables repurchased by the Sponsor and Administrative Purchase Payments with respect to Administrative Receivables purchased by the Servicer, in each case in respect of such Collection Period; |
| (iv) | any recovery in respect of any Receivable pursuant to any Dealer Recourse; and |
| (v) | the amount paid by the Servicer pursuant to any exercise of the Servicer’s option, if any, to purchase the Receivables. |
Available Collections on any Payment Date will exclude the Supplemental Servicing Fee.
“Defaulted Receivable” means a Receivable (other than an Administrative Receivable or a Warranty Receivable) as to which (a) all or any part of a Scheduled Payment is 120 or more days past due, or (b) if all or any part of a Scheduled Payment is less than 120 days past due, the Servicer has, in accordance with its Customary Servicing Practices, (i) determined that eventual payment in full is unlikely, (ii) repossessed and liquidated the related Financed Vehicle or (iii) repossessed and held the related Financed Vehicle in its repossession inventory for 90 days, whichever of clauses (i), (ii) or (iii) occurs first. The Principal Balance of any Receivable that becomes a Defaulted Receivable will be deemed to be zero as of the date it becomes a Defaulted Receivable. The Servicer’s policy is to charge-off retail installment sales contracts as soon as disposition of the vehicle has been effected and sales proceeds have been received, and may in some circumstances charge-off an auto loan contract prior to repossession. When repossession and disposition of the collateral related to a Receivable has not been effected, TMCC’s policy with respect to Receivables included in the Issuing Entity is to charge-off as soon as TMCC determines that the vehicle cannot be recovered, but not later than when the contract is 120 days contractually delinquent.
Calculation of Principal Distribution Amounts
First Priority Principal Distribution Amount. The “First Priority Principal Distribution Amount” means, with respect to any Payment Date, an amount equal to the excess, if any, of (a) the aggregate outstanding principal amount of the Class A Notes as of such Payment Date (before giving effect to any principal payments made on the Class A Notes on such Payment Date), over (b) the Adjusted Pool Balance as of the last day of the related Collection Period; provided, however, that (i) the First Priority Principal Distribution Amount on the Class A-1 Final Scheduled Payment Date will not be less than the amount that is necessary to reduce the outstanding principal amount of the Class A-1 Notes to zero; (ii) the First Priority Principal Distribution Amount on the Class A-2 Final Scheduled Payment Date will not be less than the amount that is necessary to reduce the outstanding principal amount of the Class A-2 Notes to zero; (iii) the First Priority Principal Distribution Amount on the Class A-3 Final Scheduled Payment Date will not be less than the amount that is necessary to reduce the outstanding principal amount of the Class A-3 Notes to zero; and (iv) the First Priority Principal Distribution Amount on the Class A-4 Final Scheduled Payment Date will not be less than the amount that is necessary to reduce the outstanding principal amount of the Class A-4 Notes to zero.
The “Pool Balance” means, as of any date, an amount equal to the aggregate Principal Balance of the Receivables as of that date.
The “Adjusted Pool Balance” means, as of any date, the Pool Balance less the Yield Supplement Overcollateralization Amount.
The “Principal Balance” of a Receivable, as of any date, means an amount equal to the Amount Financed (as defined in the Sale and Servicing Agreement) minus the sum of (i) that portion of all Scheduled Payments actually received on or prior to such date allocable to principal, (ii) any Warranty Purchase Payment or Administrative Purchase Payment with respect to such Receivable received on or prior to such date and allocable to principal (to the extent not included in clause (i) above) and (iii) any prepayments or other payments received on or prior to such date and applied to reduce the unpaid Principal Balance of such Receivable (to the extent not included in clauses (i) and (ii) above).
Second Priority Principal Distribution Amount. The “Second Priority Principal Distribution Amount” means, with respect to any Payment Date, an amount equal to (a) the excess, if any, of (i) the aggregate outstanding principal amount of the Class A Notes and the Class B Notes as of such Payment Date (before giving effect to any principal payments made on the Class A Notes and the Class B Notes on such Payment Date), over (ii) the Adjusted Pool Balance as of the last day of the related Collection Period minus (b) the First Priority Principal Distribution Amount for such Payment Date; provided, however, that the Second Priority Principal Distribution Amount on the Class B Final Scheduled Payment Date will not be less than the amount that is necessary to reduce the outstanding principal amount of the Class B Notes to zero.
Regular Principal Distribution Amount. The “Regular Principal Distribution Amount” means, with respect to any Payment Date, an amount equal to (a) the excess, if any, of (i) the aggregate outstanding principal amount of the Notes as of such Payment Date (before giving effect to any principal payments made on the Notes on such Payment Date), over (ii) the excess, if any, of the Adjusted Pool Balance as of the last day of the related Collection Period less the Overcollateralization Target Amount, minus (b) the sum of the First Priority Principal Distribution Amount and the Second Priority Principal Distribution Amount for such Payment Date.
The “Overcollateralization Target Amount” with respect to any Payment Date is equal to approximately 0.85% of the Adjusted Pool Balance as of the Cutoff Date.
Priority of Payments
On each Payment Date, except after an Event of Default resulting in an acceleration of the Notes, the Issuing Entity will make the following payments in the following order of priority (after payment to the Servicer of the Supplemental Servicing Fee, to the extent not previously retained by the Servicer) from Available Collections for the related Collection Period and, if necessary and available, from amounts withdrawn from the Reserve Account:
| 1. | Servicing Fee –– to the Servicer, the Servicing Fee; |
| 2. | Transaction Fees and Expenses –– to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer, the amount of any fees, expenses and indemnification amounts due to each such party, pro rata, based on amounts due to each such party, in an aggregate amount not to exceed $300,000 in any calendar year; |
| 3. | Class A Note Interest –– to the Class A Noteholders (pro rata, based upon the aggregate amount of interest due to each class of the Class A Notes), accrued and unpaid interest on each class of the Class A Notes, together with any amounts that were to be paid pursuant to this clause (3) on any prior Payment Date but were not paid because Available Collections were not sufficient to make such payment (with interest accrued on such unpaid amounts at the rate or rates at which interest accrued on the related Notes during the relevant Interest Period or Interest Periods); |
| 4. | Class A Note Principal –– to the Noteholders, for distribution in respect of principal of the Notes, in the priority described above under “Description of the Notes—Payments of Principal,” an amount equal to the First Priority Principal Distribution Amount for such Payment Date; |
| 5. | Class B Note Interest –– to the Class B Noteholders, accrued and unpaid interest on the Class B Notes, together with any amounts that were to be paid pursuant to this clause (5) on any prior Payment Date but were not paid because Available Collections were not sufficient to make such payment (with interest accrued on such unpaid amounts at the rate at which interest accrued on the Class B Notes during the relevant Interest Period or Interest Periods); |
| 6. | Note Principal –– to the Noteholders, for distribution in respect of principal of the Notes, in the priority described above under “Description of the Notes—Payments of Principal,” an amount equal to the Second Priority Principal Distribution Amount for such Payment Date; |
| 7. | Reserve Account Deposit –– to the Reserve Account, to the extent amounts then on deposit in the Reserve Account are less than the Specified Reserve Account Balance described below under “—Credit and Cash Flow Enhancement—Reserve Account,” until the amount on deposit in the Reserve Account equals such Specified Reserve Account Balance; |
| 8. | Note Principal –– to the Noteholders, for distribution in respect of principal of the Notes, in the priority described above under “Description of the Notes—Payments of Principal,” an amount equal to the Regular Principal Distribution Amount for such Payment Date; |
| 9. | Additional Transaction Fees and Expenses –– to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer, the amount of any fees, expenses and indemnification amounts due to each such party and not paid in clause (2) above, pro rata, based on amounts due to each such party; and |
| 10. | Excess Amounts –– to the Certificateholder, any remaining Available Collections for such Payment Date. |
Payments After Occurrence of Event of Default Resulting in Acceleration
After an Event of Default that results in the acceleration of the maturity of the Notes and unless and until such acceleration has been rescinded, the Issuing Entity will make the following payments in the following order of priority (after payment to the Servicer of the Supplemental Servicing Fee, to the extent not previously retained by the Servicer) from Available Collections for the related Collection Period:
| 1. | Servicing Fee –– to the Servicer, the Servicing Fee; |
| 2. | Transaction Fees and Expenses ––to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer, the amount of any fees, expenses and indemnification amounts due to each such party, pro rata, based on amounts due to each such party; |
| 3. | Class A Note Interest––to the Class A Noteholders (pro rata, based upon the aggregate amount of interest due to each class of the Class A Notes), accrued and unpaid interest on each class of the Class A Notes, together with any amounts that were to be paid as interest on the Class A Notes on any prior Payment Date but were not paid because Available Collections were not sufficient to make such payment (with interest accrued on such unpaid amounts at the rate or rates at which interest accrued on the related Notes during the relevant Interest Period or Interest Periods); |
| 4. | Class A Note Principal –– first, to the holders of the Class A-1 Notes until the principal amount of the Class A-1 Notes is reduced to zero, and second, pro rata, based upon their respective unpaid principal amounts, to the holders of the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes, until the principal amount of each such class of Notes is reduced to zero; |
| 5. | Class B Note Interest –– to the Class B Noteholders, accrued and unpaid interest on the Class B Notes, together with any amounts that were to be paid as interest on the Class B Notes on any prior Payment Date but were not paid because Available Collections were not sufficient to make such payment (with interest accrued on such unpaid amounts at the rate at which interest accrued on the Class B Notes during the relevant Interest Period or Interest Periods); |
| 6. | Class B Note Principal –– to the holders of the Class B Notes, until the principal amount of the Class B Notes is reduced to zero; and |
| 7. | Excess Amounts –– to the Certificateholder, any remaining Available Collections for such Payment Date. |
Following the occurrence of an Event of Default under the Indenture that results in the acceleration of the maturity of the Notes, amounts on deposit in the Reserve Account will be withdrawn and used to the extent necessary to pay principal of the Notes as described in clauses (4) and (6) above, in that order of priority.
Credit and Cash Flow Enhancement
The presence of credit enhancement for the benefit of any class of Notes is intended to enhance the likelihood of receipt by the Noteholders of such class of the full amount of principal and interest due thereon and to decrease the likelihood that such Noteholders will experience losses. The credit enhancement for a class of Notes will not provide protection against all risks of loss and will not guarantee repayment of the entire principal amount and interest thereon. If losses occur that exceed the amount covered by any credit enhancement or that are not covered by any credit enhancement, Noteholders of any class will bear their allocable share of deficiencies. In addition, if a form of credit enhancement covers more than one class of Notes, Noteholders of any such class will be subject to the risk that such credit enhancement will be exhausted by the claims of Noteholders of other classes.
Subordination of Principal and Interest. The subordination of the Class B Notes to the Class A Notes, as described under “—Priority of Payments” above is intended to provide credit enhancement to the Class A Notes. Payments of principal will not be made on the Class B Notes until the principal on the Class A Notes has been paid in full. Payments of interest will not be made on the Class B Notes on a Payment Date until accrued and unpaid interest on the Class A Notes and the First Priority Principal Distribution Amount has been paid. Also, if payment of the Notes has been accelerated after an Event of Default, then no payments of interest or principal will be made on the Class B Notes until the Class A Notes have been paid in full. While any Class A Notes are outstanding, the failure to pay interest on the Class B Notes will not be an Event of Default. When the Class A Notes are no longer outstanding, an Event of Default will occur if the full amount of interest due on the Class B Notes is not paid within five Business Days after the related Payment Date.
Reserve Account. The Reserve Account will be a segregated trust account established by the Depositor pursuant to the Sale and Servicing Agreement on the Closing Date and maintained and held by the Indenture Trustee for the benefit of the Noteholders (the “Reserve Account”). Any amounts held on deposit in the Reserve Account will be owned by the Depositor, subject to the right of the Indenture Trustee to withdraw such amounts as described below. Prior to an Event of Default that results in an acceleration of the maturity of the Notes, any net investment earnings thereon will be distributed to the Depositor on each Payment Date and will be taxable to the Sponsor, for so long as the Sponsor is the sole member of the Depositor (and the Depositor is not treated as a corporation), for U.S. federal income tax purposes. Except as described below, no funds will be withdrawn from, and no amounts will be deposited into, the Reserve Account.
The Depositor will grant to the Indenture Trustee, for the benefit of the Noteholders, a security interest in the accounts of the Issuing Entity, including any funds in the Reserve Account and the proceeds thereof (subject to the right of the Depositor to investment earnings thereon), to secure the payment of interest on the Notes, the payment of principal on the Notes on any Payment Date to the extent the aggregate outstanding principal amount of the Notes exceeds the Adjusted Pool Balance as of the last day of the related Collection Period and the payment of principal on any class of Notes on the Final Scheduled Payment Date of that class of Notes, and the Indenture Trustee will have all of the rights of a secured party under the Uniform Commercial Code (the “UCC”) with respect thereto.
On the Closing Date, the Depositor will cause to be deposited $4,000,012.35 into the Reserve Account, which is approximately 0.25% of the Adjusted Pool Balance as of the Cutoff Date. On each Payment Date, after making required payments to the Servicer, the Indenture Trustee, the Owner Trustee, the Asset Representations Reviewer and the Noteholders, as described under “—Priority of Payments” above, the Issuing Entity will make a deposit into the Reserve Account to the extent that funds are available therefor to the extent necessary to maintain the amount on deposit in the Reserve Account at a Specified Reserve Account Balance.
The “Specified Reserve Account Balance” with respect to any Payment Date will be an amount equal to the lesser of (i) $4,000,012.35 (which is approximately 0.25% of the Adjusted Pool Balance as of the Cutoff Date) and
(ii) the outstanding principal amount of the Notes (after giving effect to any principal payments made on the Notes on such Payment Date).
The amount of funds on deposit in the Reserve Account may decrease on each Payment Date by withdrawals of funds (i) to cover shortfalls in the amounts required to be distributed pursuant to clauses (1) through (6) under “—Priority of Payments” above, (ii) after an Event of Default that results in the acceleration of the maturity of the Notes, to pay principal on the Notes, and (iii) to pay principal on any class of Notes on the Final Scheduled Payment Date of that class of Notes.
If the principal amount of a class of Notes is not paid in full on the related Final Scheduled Payment Date, the Indenture Trustee will withdraw amounts (if available) from the Reserve Account, to reduce the principal amount of such class of Notes to zero.
The Servicer may amend the formula or percentage for determining the Specified Reserve Account Balance that is different from that described above or make certain changes with respect to the manner by which the Reserve Account is funded pursuant to the amendment provisions of the Sale and Servicing Agreement described under “Transfer and Servicing Agreements—Amendment” in this prospectus.
As of the close of business on any Payment Date that occurs prior to an Event of Default that results in the acceleration of the maturity of the Notes and on which the amount of funds on deposit in the Reserve Account (excluding net investment earnings, which will be distributed on each such Payment Date to the Depositor) is greater than the Specified Reserve Account Balance for such Payment Date, the Servicer will instruct the Indenture Trustee to release and distribute such excess to the Depositor.
Funds on deposit in the Reserve Account may be invested in Eligible Investments. Prior to the occurrence of an Event of Default resulting in an acceleration of the maturity of the Notes, net investment earnings on monies on deposit in the Reserve Account will be released to the Depositor and will not be available for payment to Noteholders or otherwise subject to any claims or rights of the Noteholders. Any net loss on such investments will be charged to the Reserve Account.
After the payment in full, or the provision for such payment, of (i) all accrued and unpaid interest on the Notes and (ii) the outstanding principal amount of the Notes, any funds remaining on deposit in the Reserve Account, subject to certain limitations, will be paid to the Depositor.
Overcollateralization. Overcollateralization represents the amount by which the Adjusted Pool Balance exceeds the outstanding principal amount of the Notes. The Adjusted Pool Balance as of the Cutoff Date is expected to be approximately equal to the aggregate principal amount of the Notes as of the Closing Date. In addition to providing credit enhancement, overcollateralization also serves to provide limited protection against losses and low-interest Receivables.
The following table shows the Notes as a percentage of the initial Pool Balance and as a percentage of the initial Adjusted Pool Balance. The percentages may not add to the total percentage shown due to rounding.
| | | Percentage of Initial Pool Balance | | Percentage of Adjusted Pool Balance | |
| | Class A Notes | 93.64% | | 97.50% | |
| | Class B Notes | 2.40% | | 2.50% | |
| | Total | 96.04% | | 100.00% | |
The application of funds on each Payment Date according to clause (8) of the first paragraph under “—Priority of Payments” above is designed to achieve and maintain the level of overcollateralization as of any Payment Date to the Overcollateralization Target Amount. The overcollateralization is an additional source of funds to absorb losses on the Receivables that are not otherwise covered by excess collections for the Receivables, if any.
To achieve and maintain the amount of overcollateralization on any Payment Date at the Overcollateralization Target Amount, the Issuing Entity must make principal payments on the Notes in an amount greater than the decline in the Adjusted Pool Balance for the preceding month. The use of Available Collections to make Regular Principal Distribution Amount payments is expected to achieve and maintain overcollateralization at an amount equal to the Overcollateralization Target Amount. When the actual amount of overcollateralization is
less than the Overcollateralization Target Amount, principal payments will be made to the Noteholders from Available Collections until the Overcollateralization Target Amount is reached.
Yield Supplement Overcollateralization Amount. Because the Receivables include a substantial number of low APR Receivables, the Receivables could generate less collections of interest than the sum of (i) the Servicing Fee, (ii) fees, expenses and indemnification amounts required to be paid to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer and (iii) interest payments on the Notes and any required deposits in the Reserve Account if the low APR Receivables are not adequately offset by high APR Receivables. The yield supplement overcollateralization amount is intended to compensate for low APRs on some of the Receivables.
The “Yield Supplement Overcollateralization Amount” for each Payment Date, or with respect to the Closing Date, is the aggregate amount by which the Principal Balance as of the last day of the related Collection Period or as of the Cutoff Date, as applicable, of each of the related Receivables with an APR as stated in the related contract of less than the Required Rate, other than a Defaulted Receivable, exceeds the present value, calculated using a discount rate of the Required Rate, of each scheduled payment of each such Receivable assuming such scheduled payment is made on the last day of each month and each month has 30 days.
The Yield Supplement Overcollateralization Amount on the Closing Date will be $66,023,073.45.
Excess Interest. More interest is expected to be paid by the Obligors in respect of the Receivables than is necessary to pay the sum of (i) the Servicing Fee, (ii) fees required to be paid to the Indenture Trustee, the Owner Trustee and the Asset Representations Reviewer and (iii) interest on the Notes each month. Any such excess in interest payments from Obligors will serve as additional credit enhancement.
TRANSFER AND SERVICING AGREEMENTS
The Transfer and Servicing Agreements
The following summary describes certain terms of the Transfer and Servicing Agreements. The summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the Transfer and Servicing Agreements. Forms of the Transfer and Servicing Agreements have been filed as exhibits to the Registration Statement. Copies of the Transfer and Servicing Agreements will be filed as an exhibit to a current report on Form 8-K with the SEC. For additional information regarding reports required to be filed by the Depositor, you should refer to “Where You Can Find More Information About Your Notes—The Depositor” in this prospectus.
Sale and Assignment of Receivables
On the Closing Date, TMCC will sell and assign to the Depositor, without recourse, pursuant to the Receivables Purchase Agreement, its entire interest in the Receivables, including the security interests in the Financed Vehicles. On the Closing Date, the Depositor will transfer and assign to the Issuing Entity, without recourse, pursuant to the Sale and Servicing Agreement, its entire interest in the Receivables, including its security interests in the related Financed Vehicles. Each such Receivable will be identified in the transfer notice (the “Transfer Notice”) delivered to the Issuer pursuant to the Sale and Servicing Agreement. The Issuing Entity will pledge its assets, including the Receivables, to the Indenture Trustee for the benefit of the Noteholders. The Indenture Trustee will, concurrently with such transfer and assignment, on behalf of the Issuing Entity, execute and deliver the Notes and the Certificate. The net proceeds received from the sale of the Notes will be applied to the purchase of the Receivables from TMCC and to make the required initial deposit into the accounts of the Issuing Entity.
Pursuant to the Sale and Servicing Agreement, to ensure uniform quality in servicing both the Receivables and the Servicer’s own portfolio of car, crossover utility vehicle, light-duty truck and sport utility vehicle retail installment sales contracts, as well as to reduce administrative costs, the Depositor and the Issuing Entity will designate the Servicer as custodian to maintain possession or, in the case of electronic contracts, control (directly or through an agent), on behalf of the Issuing Entity, of the related installment sales contracts and any other documents relating to the Receivables. In performing its duties as custodian, the Servicer will act with reasonable care, using the same degree of skill and attention that the Servicer exercises with respect to the Receivable files relating to comparable automotive Receivables that the Servicer services for itself or others. The Servicer will make available to the Issuing Entity and the Indenture Trustee a list of the locations of the Receivable files and the related accounts,
records and computer systems maintained by the Servicer at such times during normal business hours as instructed by the Issuing Entity or the Indenture Trustee with reasonable advance notice. The Receivables will not be physically segregated from other car, crossover utility vehicle, light-duty truck and sport utility vehicle retail installment sales contracts of the Servicer, or those which the Servicer services for others, to reflect the transfer to the Issuing Entity. However, UCC financing statements perfecting the sale and assignment of the Receivables by TMCC to the Depositor and by the Depositor to the Issuing Entity and the pledge of the Receivables by the Issuing Entity to the Indenture Trustee will be filed, and the respective accounting records and computer files of TMCC and the Depositor will reflect such sale and assignment. The Depositor, or the Servicer on behalf of the Depositor, will be responsible for maintaining the perfection of such interest through the filing of continuation statements or amended financing statements, as applicable. Because the Receivables will remain in the possession or control of the Servicer or its agent and will not be stamped or otherwise marked to reflect the assignment to the Indenture Trustee, if a subsequent purchaser were able to take physical possession or, in the case of electronic Receivables, control of the Receivables without knowledge of the assignment, the Indenture Trustee’s interest in the Receivables could be defeated. For additional information, you should refer to “Risk Factors—Risks Primarily Related to the Bankruptcy and Insolvency of Transaction Parties and Perfection of Security Interests—The issuing entity’s interests in financed vehicles may be unenforceable or defeated” and “Certain Legal Aspects of the Receivables—Security Interests” in this prospectus. In addition, under certain circumstances the Indenture Trustee’s security interest in collections that have been received by the Servicer but not yet remitted to the Collection Account could be defeated.
Accounts
On or prior to the Closing Date, the Servicer will establish and the Indenture Trustee will maintain a trust account in the name of the Indenture Trustee for the benefit of the Noteholders, into which collections on or in respect of the Receivables, and all amounts released from the Reserve Account, will be deposited (the “Collection Account”), together with income received on the investment of funds on deposit in the Collection Account. The Depositor will establish and will maintain with the Indenture Trustee the accounts of the Issuing Entity for the benefit of the Noteholders. The accounts of the Issuing Entity will not be assets of the Issuing Entity.
Servicing Procedures
The Servicer, for the benefit of the Issuing Entity, will manage, service, administer and make collections on the Receivables (other than Administrative Receivables and Warranty Receivables) with reasonable care, using the same degree of skill and attention that the Servicer exercises with respect to all comparable motor vehicle retail installment sales contracts that it services for itself or others. The Servicer’s duties will include collection and posting of all payments, responding to inquiries of Obligors or federal, state or local government authorities with respect to the Receivables, investigating delinquencies, sending payment coupons to Obligors, reporting tax information to Obligors in accordance with its Customary Servicing Practices, policing the collateral, accounting for collections and furnishing monthly and annual statements to the Indenture Trustee and Owner Trustee with respect to distributions, generating U.S. federal income tax information and performing the other duties specified in the Sale and Servicing Agreement. The Servicer will, in accordance with its Customary Servicing Practices, have full power and authority, acting alone, to do any and all things in connection with such managing, servicing, administration and collection that it may deem necessary or desirable. Without limiting the generality of the foregoing, the Servicer will be authorized and empowered to execute and deliver, on behalf of itself, the Issuing Entity, the Owner Trustee, the Indenture Trustee, the Securityholders or any of them, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the Receivables and the Financed Vehicles. The Servicer is authorized to commence, in its own name or in the name of the Issuing Entity, a legal proceeding to enforce a defaulted Receivable or to commence or participate in a legal proceeding (including, without limitation, a bankruptcy proceeding) relating to or involving a Receivable, including a defaulted Receivable. If the Servicer commences or participates in such a legal proceeding in its own name, the Issuing Entity will be deemed to have automatically assigned, solely for the purpose of collection on behalf of the party retaining an interest in such Receivable, such Receivable and the other related property of the Issuing Entity with respect to such Receivable to the Servicer for purposes of commencing or participating in any such proceeding as a party or claimant. The Servicer is also authorized and empowered under the Sale and Servicing Agreement to execute and deliver in the Servicer’s name any notices, demands, claims, complaints, responses, affidavits or other documents or instruments in connection with any such proceeding. If in any enforcement suit or legal proceeding, it will be held that the Servicer may not enforce a Receivable on the grounds that it will not be a real party in interest or a holder entitled to enforce such Receivable, the Issuing Entity will, at the Servicer’s expense and written direction, take
steps to enforce such Receivable, including bringing suit in its name or the name of the Indenture Trustee, the Noteholders or the Certificateholders. The Issuing Entity is required to furnish the Servicer with any powers of attorney and other documents and take any other steps which the Servicer may deem necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under the Sale and Servicing Agreement.
The Servicer will make reasonable efforts to collect all payments due with respect to the Receivables held by the Issuing Entity and will, consistent with the Sale and Servicing Agreement, follow the collection procedures it follows with respect to comparable motor vehicle retail installment sales contracts it services for itself and others.
Consistent with its normal procedures, the Servicer will be authorized to grant certain rebates, adjustments or extensions with respect to the Receivables without the prior written consent of the Owner Trustee or the Indenture Trustee. However, if the amount of any Scheduled Payment due in a subsequent Collection Period is reduced as a result of any modification to the related APR or the Amount Financed (as defined in the Sale and Servicing Agreement), an increase in the total number of Scheduled Payments or an extension of the maturity of a Receivable beyond the end of the Collection Period preceding the Class B Final Scheduled Payment Date, the Servicer will be obligated to purchase such Administrative Receivable, as described below, provided that the Servicer will have no such obligation to repurchase an Administrative Receivable as a result of any such extension of the maturity of such Administrative Receivable if it is required to grant such extension under law or pursuant to a court order. However, the Servicer may, if a default, breach, violation, delinquency or event permitting acceleration under the terms of any Receivable has occurred or, in the judgment of the Servicer, is imminent:
| (A) | extend such Receivable for credit-related reasons that would be acceptable to the Servicer with respect to comparable Receivables that it services for itself, but only if the Final Scheduled Payment Date of such Receivable as extended would not be later than the Class B Final Scheduled Payment Date; or |
| (B) | reduce an Obligor’s monthly payment amount in the event of a prepayment resulting from refunds of credit life and disability insurance premiums and service contracts and make similar adjustments in an Obligor’s payment terms to the extent required by law. |
Additionally, if at the end of the scheduled term of any Receivable, the outstanding principal balance of the Receivable is such that the final payment to be made by the related Obligor is larger than the regularly scheduled payment of principal and interest made by such Obligor, the Servicer may permit such Obligor to pay such remaining principal balance in more than one payment of principal and interest, provided that the last such payment will be due on or prior to the last day of the Collection Period preceding the Class B Final Scheduled Payment Date. The Servicer may, in accordance with its Customary Servicing Practices, waive any late payment charge or any other fees that may be collected in the ordinary course of servicing the Receivables.
If the Servicer determines that eventual payment in full of a Receivable is unlikely, the Servicer will follow its Customary Servicing Practices to recover all amounts due upon such Receivable, including the repossession and disposition of the related Financed Vehicle at a public or private sale, or the taking of any other action permitted by applicable law. For additional information, you should refer to “Certain Legal Aspects of the Receivables” in this prospectus.
Servicing Compensation and Payment of Expenses
The Servicing Fee, together with any previously unpaid Servicing Fee, will be paid to the Servicer on each Payment Date solely to the extent of Available Collections and, to the extent available, the amount on deposit in the Reserve Account. The Servicer will be entitled to collect and retain as additional servicing compensation the Supplemental Servicing Fee (together with the Servicing Fee, the “Total Servicing Fee”). For additional information, you should refer to “—Collections” in this prospectus. The Servicer will be paid the Servicing Fee for each Collection Period on the following Payment Date related to that Collection Period. The Servicing Fee will be paid from Available Collections in accordance with the priority of payments described under “Payments to Noteholders––Priority of Payments” in this prospectus.
The Total Servicing Fee will compensate the Servicer for performing the functions of a third-party servicer of Receivables as an agent for their beneficial owner, including collecting and processing payments, responding to inquiries of Obligors on the Receivables, investigating delinquencies, sending payment statements, paying costs of the sale or other disposition of the Financed Vehicles, collections and servicing the Receivables, including
accounting for collections. The Total Servicing Fee will also compensate the Servicer for administering the Receivables, including furnishing monthly and annual statements to the Owner Trustee and Indenture Trustee with respect to payments and generating U.S. federal income tax information for the Issuing Entity and for the Securityholders. The Total Servicing Fee will also reimburse the Servicer for certain taxes, accounting fees, outside auditor fees, data processing costs and other costs incurred in connection with administering the Receivables.
As compensation for the performance of the Administrator’s obligations and as reimbursement for its expenses related thereto, the Administrator will be entitled to a monthly administration fee, which will be paid by the Servicer from the Total Servicing Fee.
Insurance on Financed Vehicles
Each Receivable requires the related Obligor to possess physical damage insurance which covers loss or damage to the Financed Vehicle in an amount not less than the full value of the vehicle, and to provide evidence of such insurance upon TMCC’s request. TMCC is required to be named as loss payee under such insurance policies. Since the Obligors may select their own insurers to provide the requisite coverage, the specific terms and conditions of their policies may vary. The terms of each Receivable allow, but do not require, TMCC to obtain any such coverage on behalf of the Obligor. In accordance with its normal servicing procedures, TMCC currently does not exercise its right to obtain insurance coverage on behalf of the Obligor. TMCC currently does not monitor ongoing customer insurance coverage in connection with its Customary Servicing Practices. In the event that the failure of an Obligor to maintain any such required insurance results in a shortfall in amounts to be paid to Securityholders, to the extent such shortfall is not covered by amounts on deposit in the Reserve Account or other methods of credit enhancement, the Securityholders could suffer a loss on their investment.
Collections
Except as described under “—Servicing Compensation and Payment of Expenses” above, the Servicer will deposit all payments on the Receivables (from whatever source) and all proceeds of such Receivables collected during each Collection Period into the Collection Account.
For as long as (i) TMCC is the Servicer, (ii) no Event of Default or Servicer Default shall have occurred and be continuing, and (iii) TMCC’s unsecured debt ratings satisfy certain requirements or are otherwise acceptable to each Rating Agency, as required under the Sale and Servicing Agreement, the Servicer generally may retain all payments on or in respect of the Receivables received from Obligors and all proceeds of Receivables collected during each Collection Period without segregation in its own accounts until deposited in the Collection Account on or prior to the related Payment Date. However, if the conditions stated in the immediately preceding sentence are not met, the Servicer will deposit all such payments and proceeds into the Collection Account not later than two Business Days after receipt and identification thereof. Pending deposit into the Collection Account, the Servicer may invest collections at its own risk and for its own benefit. Such amounts will not be segregated from its own funds. The Servicer, at its own risk and for its own benefit, may instruct the Indenture Trustee in writing to invest amounts held in the Collection Account in Eligible Investments from the time deposited until the related Payment Date. The Depositor, at its own risk and for its own benefit, may instruct the Indenture Trustee to invest amounts held in the Reserve Account, if any, in Eligible Investments from each Payment Date (or the Closing Date) to the next Payment Date. The Sponsor or the Servicer, as the case may be, will remit the aggregate Warranty Purchase Payments and Administrative Purchase Payments, respectively, of any Receivables to be purchased from the Issuing Entity into the Collection Account on or before the related Payment Date. Prior to an Event of Default or a Servicer Default, all decisions regarding deposits and withdrawals from the Collection Account will be made by the Servicer in accordance with the terms of the Transfer and Servicing Agreements and will not be independently verified.
The Servicer will not be required to, and is not expected to, make advances of interest or principal payments on the Receivables.
Collections on or in respect of a Receivable made during a Collection Period (including Warranty Purchase Payments and Administrative Purchase Payments) which are not late fees, extension fees or certain other similar fees or charges will be applied to the related Scheduled Payment. Any collections on or in respect of a Receivable remaining after such applications will be considered an “Excess Payment.” Excess Payments will be applied as a prepayment. On the records and computer systems maintained by the Servicer, Excess Payments that do not constitute a prepayment in full typically result in future payments not being due on such Receivable in the amount of such Excess Payments.
Eligible Investments
Funds in the Collection Account and the Reserve Account (collectively, the “Trust Accounts”) will be invested, at the direction of the Servicer, in Eligible Investments.
“Eligible Investments” means, at any time, any one or more of the following obligations and securities, which are subject to other requirements as specified in the Sale and Servicing Agreement: (a) obligations of, and obligations fully guaranteed as to timely payment of principal and interest by, the United States or any agency thereof, provided such obligations are backed by the full faith and credit of the United States; (b) general obligations of or obligations guaranteed by Federal National Mortgage Association, or any State of the United States, the District of Columbia or the Commonwealth of Puerto Rico which obligations are rated in the highest available credit rating for such obligations of each Rating Agency; (c) certificates of deposit issued by any depository institution or trust company (including the Indenture Trustee) incorporated under the laws of the United States or of any State thereof, the District of Columbia or the Commonwealth of Puerto Rico and subject to supervision and examination by banking authorities of one or more of such jurisdictions, provided that the short-term unsecured debt obligations of such depository institution or trust company are then rated the highest available rating of each Rating Agency for such obligations; (d) certificates of deposit, commercial paper, demand or time deposits of, bankers’ acceptances issued by, or federal funds sold by, any depository institution or trust company (including the Indenture Trustee or any affiliate of the Indenture Trustee) incorporated under the laws of the United States or any State and subject to supervision and examination by federal and/or State banking authorities and the deposits of which are fully insured by the Federal Deposit Insurance Corporation (the “FDIC”), so long as at the time of such investment or contractual commitment providing for such investment, either such depository institution or trust company is an Eligible Institution (or if such investment will mature after more than one month, the long-term, unsecured debt of the issuer has the highest available rating from each Rating Agency) or in respect of which the Rating Agency Condition has been satisfied; (e) certificates of deposit issued by any bank, trust company, savings bank or other savings institution that is an Eligible Institution and is fully insured by the FDIC (or if such investment will mature after more than one month, the long-term, unsecured debt of the issuer has the highest available rating from each Rating Agency); (f) repurchase obligations held by the Indenture Trustee that are acceptable to the Indenture Trustee with respect to any security described in clauses (a), (b) or (g) hereof or any other security issued or guaranteed by any other agency or instrumentality of the United States, in either case entered into with a federal agency or a depository institution or trust company (acting as principal) described in clause (d) above (including the Indenture Trustee), subject to the limitations described in the Sale and Servicing Agreement; (g) securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States or any State (including commercial paper of the Sponsor or its affiliates) so long as, at the time of such investment or contractual commitment providing for such investment, (i) the long-term, unsecured debt, or if such securities are commercial paper, the short-term unsecured debt, of such corporation has the highest available rating from each Rating Agency or (ii) the Rating Agency Condition has been satisfied in respect of such investment; (h) money market funds, mutual funds or other pooled investment vehicles, including any such fund for which the Indenture Trustee or an affiliate thereof serves as an investment advisor, administrator, shareholder servicing agent and/or custodian or subcustodian, subject to the requirements described in the Sale and Servicing Agreement; (i) investments in Eligible Investments maintained in “sweep accounts,” short-term asset management accounts and the like utilized for the investment, on an overnight basis, of residual balances in investment accounts maintained at the Indenture Trustee or any other depository institution or trust company (including the Indenture Trustee) incorporated under the laws of the United States or any State and subject to supervision and examination by federal and/or State banking authorities and the deposits of which are fully insured by the FDIC, so long as, at the time of such investment or contractual commitment providing for such investment, either such depository institution or trust company is an Eligible Institution (or if such investment will mature after more than one month, the long-term, unsecured debt of the issuer has the highest available rating from each Rating Agency) or in respect of which the Rating Agency Condition has been satisfied; and (j) such other investments in respect of which the Rating Agency Condition has been satisfied; provided that each of the foregoing investments will mature or be liquidated (i) on the Payment Date next succeeding such investment or (ii) if the short-term unsecured debt obligations of the Indenture Trustee has the highest available rating from each Rating Agency on the date such investment is made, on the Business Day immediately preceding the Payment Date next succeeding such investment. Eligible Investments are limited to obligations or securities that mature on or before the next Payment Date. However, to the extent permitted by the Rating Agencies, funds in any Trust Account may be invested in securities that will not mature prior to the date of the next payment with respect to such Notes and will not be sold to meet any shortfalls. Thus, the amount of cash in the accounts of the Issuing Entity at any time may be less than the balance of the amount specified for their respective purposes. If the amount required to be withdrawn from the Reserve Account to cover shortfalls in collections on the Receivables exceeds the
aggregate amount of cash in the available credit enhancement methods, a temporary shortfall in the amounts paid to the related Noteholders could result, which could, in turn, increase the weighted average lives of the Notes. Investment earnings on funds deposited in the Trust Accounts, net of losses and investment expenses (collectively, “Investment Earnings”), will be released to the Servicer on each Payment Date as additional servicing compensation, or to the Depositor (in the case of Investment Earnings in the Reserve Account).
The Trust Accounts will be maintained as either (a) a segregated account with an Eligible Institution or (b) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution have a credit rating acceptable to the Rating Agencies (an “Eligible Deposit Account”). “Eligible Institution” means a depository institution or trust company (which may be the Owner Trustee, the Indenture Trustee or any of their respective affiliates) organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), (i) which has either (A) a long-term unsecured debt rating acceptable to the Rating Agencies, (B) a short-term unsecured debt rating or certificate of deposit rating acceptable to the Rating Agencies or (C) such other rating that is acceptable to each Rating Agency and (ii) whose deposits are insured by the FDIC. In the event that the Collection Account maintained with the Indenture Trustee is no longer an Eligible Deposit Account, then the Servicer will, with the Indenture Trustee’s assistance as necessary, use reasonable efforts to cause the Collection Account to be moved to an Eligible Institution within 60 days.
Payments
Beginning on the Payment Date in October 2021, payments on each class of Notes will be made by the Indenture Trustee to the Noteholders and payments on the Certificates will be made by the Owner Trustee to the Certificateholders.
Net Deposits
As an administrative convenience, unless the Servicer is required to remit collections daily as described under “—Collections” above, the Servicer will be permitted to make the deposit of collections and amounts deposited in respect of purchases of Receivables by the Depositor or the Servicer for or with respect to the related Collection Period net of payments to be made to the Servicer with respect to such Collection Period. The Servicer, however, will account to the Indenture Trustee and the Owner Trustee as if all of the foregoing deposits, payments, distributions and transfers were made individually.
Optional Purchase of Receivables and Redemption of Notes
In order to avoid excessive administrative expenses, the Notes will be redeemed in whole, but not in part, on any Payment Date on which the Servicer exercises its clean-up call option to purchase the Receivables. The Servicer, or any successor to the Servicer, may purchase the Receivables on any Payment Date on or after the Payment Date when the Pool Balance is equal to or less than 5% of the Pool Balance as of the Cutoff Date, as described under “––Termination” below. The “Redemption Price” for the outstanding Notes will be equal to at least the sum of the unpaid principal amount of the outstanding Notes plus accrued and unpaid interest thereon. Upon receipt of written notice thereof, the Owner Trustee or the Indenture Trustee will give written notice of termination to each Securityholder.
Removal of Servicer
If a Servicer Default occurs, either the Indenture Trustee or the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), voting together as a single class, may terminate the rights and obligations of the Servicer under the Sale and Servicing Agreement, or waive any Servicer Default, without the consent of the Certificateholder.
Each of the following is a “Servicer Default” as specified in the Sale and Servicing Agreement:
| (a) | any failure by the Servicer to deliver to the Indenture Trustee for deposit in the Collection Account or Reserve Account any required payment or to direct the Indenture Trustee to make any required |
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| payment or distribution therefrom, which failure continues unremedied for a period of five Business Days after discovery of the failure by an officer of the Servicer or written notice of such failure is received (i) by the Servicer from the Owner Trustee or the Indenture Trustee or (ii) by the Servicer and the Owner Trustee or the Indenture Trustee, as applicable, from the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), acting together as a single class; |
| (b) | failure by the Servicer to duly observe or to perform in any material respect any other covenants or agreements of the Servicer described in the Sale and Servicing Agreement, which failure materially and adversely affects the rights of the Certificateholder or Noteholders and continues unremedied for a period of 90 days after the date on which written notice of such failure is received (i) by the Servicer from the Owner Trustee or the Indenture Trustee or (ii) by the Servicer and the Owner Trustee and Indenture Trustee, from the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), acting together as a single class; or |
| (c) | the occurrence of an Insolvency Event with respect to the Servicer; |
provided, however, that a delay or failure of performance referred to under clauses (a) or (b) above for an additional period of 60 days will not constitute a Servicer Default if such delay or failure was caused by force majeure or other similar occurrence.
“Insolvency Event” means, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of the Servicer or any substantial part of its property 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 for the Servicer or for any substantial part of its property, or ordering the winding-up or liquidation of the Servicer’s affairs, and such decree or order remains unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by the Servicer 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 Servicer to the entry of an order for relief in an involuntary case under any such law, or the consent by the Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Servicer or for any substantial part of its property, or the making by the Servicer of any general assignment for the benefit of creditors, or the failure by the Servicer generally to pay its debts as such debts become due, or the taking of action by the Servicer in furtherance of any of the foregoing.
Upon receipt of written notice of the occurrence of a Servicer Default, the Administrator will give prompt written notice thereof to the Rating Agencies.
For additional information regarding the removal of the Servicer, you should refer to “––Rights upon Servicer Default” below.
Statements to Trustees and Issuing Entity
On each Determination Date, the Servicer will provide to the Indenture Trustee and the Owner Trustee a statement setting forth substantially the same information as is required to be provided in the periodic reports provided to Securityholders described under “Description of the Notes—Reports to Securityholders” in this prospectus.
Evidence as to Compliance
The Sale and Servicing Agreement will provide that a firm of nationally recognized independent accountants will furnish to the Issuing Entity, Administrator, Indenture Trustee and Owner Trustee annually a statement as to compliance in all material respects by the Servicer with certain standards relating to the servicing of the applicable Receivables during the preceding twelve months (or, in the case of the first such certificate, from the applicable Closing Date, which will be a shorter period).
The Sale and Servicing Agreement will also provide for delivery to the Issuing Entity, Indenture Trustee and Owner Trustee, substantially simultaneously with the delivery of such accountants’ statement referred to above, of a certificate signed by an officer of the Servicer stating that the Servicer has fulfilled its obligations under the Sale and Servicing Agreement throughout the preceding twelve months (or, in the case of the first such certificate, from the Closing Date) in all material respects or, if there has been a material default in the fulfillment of any such obligation, describing each such default. The Servicer has agreed to give the Indenture Trustee and the Owner Trustee notice of certain Servicer Defaults under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will require the Servicer to furnish to the Issuing Entity and the Indenture Trustee any report or information required to facilitate compliance by the Issuing Entity with Subpart 229.1100 – Asset Backed Securities (Regulation AB), 17 C.F.R. §§229.1100-229.1125, as that regulation may be amended from time to time, and subject to such clarification and interpretation as have been provided by the SEC in the related adopting releases or by the staff of the Commission, or as may be provided by the Commission or its staff from time to time.
Copies of such statements and certificates may be obtained by Noteholders by a request in writing addressed to the Indenture Trustee.
Certain Matters Regarding the Servicer; Servicer Liability
The Sale and Servicing Agreement will provide that TMCC may not resign from its obligations and duties as Servicer under the Sale and Servicing Agreement, except upon determination that TMCC’s performance of such duties is no longer permissible under applicable law, except as provided in the immediately following paragraph. No such resignation will become effective until the Indenture Trustee or a successor servicer has assumed TMCC’s servicing obligations and duties under the Sale and Servicing Agreement.
Under the circumstances specified in the Sale and Servicing Agreement, any entity into which the Servicer may be merged or consolidated, or any entity resulting from any merger or consolidation to which the Servicer is a party, or any entity succeeding to all or substantially all of the business of the Servicer will be the successor of the Servicer under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the Servicer nor any of its directors, officers, employees and agents will be under any liability to the Issuing Entity or the Securityholders for taking any action or for refraining from taking any action pursuant to the Sale and Servicing Agreement or for errors in judgment; except that neither the Servicer nor any such person will be protected against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of the Servicer’s duties under the Sale and Servicing Agreement or by reason of reckless disregard of its obligations and duties under the Sale and Servicing Agreement. In addition, the Sale and Servicing Agreement will provide that the Servicer is under no obligation to appear in, prosecute or defend any legal action that is not incidental to the Servicer’s servicing responsibilities under the Sale and Servicing Agreement and that, in its opinion, may cause it to incur any expense or liability.
Upon a termination of the Servicer, the Indenture Trustee will select and appoint a successor servicer to perform the outgoing Servicer’s duties and undertake its responsibilities and liabilities. The appointed successor servicer must be an established financial institution with a net worth of at least $25,000,000 and whose regular business includes the servicing of contracts. The successor servicer will hold all the rights of the outgoing Servicer under the Transfer and Servicing Agreements and will be entitled to receive the Total Servicing Fee. No successor servicer appointed in accordance with the Transfer and Servicing Agreements may resign from its duties unless the law prohibits it from continuing to perform such duties.
Upon the termination or resignation of the Servicer, the outgoing Servicer will transfer all cash amounts that are to be held by the successor servicer to the successor servicer and will provide the successor servicer with all information regarding the Receivable files that is required for the proper servicing of the Receivables. All reasonable and documented costs, expenses and fees incurred in connection with the transfer of Receivable files to the successor servicer under the provisions described in this paragraph will be paid by the outgoing Servicer. Any such costs, expenses and fees not paid by the outgoing Servicer within 90 days will be paid solely from the application of Available Collections in accordance with the priority of payments described under “Payments to Noteholders—Priority of Payments” in this prospectus. The Owner Trustee and the Indenture Trustee will provide prompt written
notice of any resignation or termination of the Servicer to the Certificateholders and Noteholders, respectively, upon either occurrence.
Rights upon Servicer Default
As long as a Servicer Default under a Sale and Servicing Agreement remains unremedied, either the Indenture Trustee or holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding, acting together as a single class (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), may terminate all the rights and obligations of the Servicer under the Sale and Servicing Agreement (except for obligations that expressly survive termination), whereupon the Indenture Trustee or a successor servicer appointed by the Indenture Trustee will succeed to all the responsibilities, duties and liabilities of the Servicer under the Sale and Servicing Agreement and will be entitled to similar compensation arrangements; provided, however, that the Indenture Trustee, as successor Servicer, will have no obligations with respect to the payment or reimbursement of fees, expenses or other amounts (including indemnities other than those resulting from the actions of the Indenture Trustee as successor Servicer) of the Owner Trustee, the Indenture Trustee or the Asset Representations Reviewer, the fees and expenses of the Owner Trustee’s attorneys, the Indenture Trustee’s attorneys, or the Asset Representations Reviewer’s attorneys, the fees and expenses of any custodian and the fees and expenses of independent accountants or expenses incurred in connection with distributions and reports to the Noteholders. If the Servicer becomes a debtor in bankruptcy or, if not eligible to be a debtor in bankruptcy, becomes the subject of insolvency proceedings, and no Servicer Default other than such commencement of a bankruptcy or insolvency proceeding has occurred, the Indenture Trustee or such Noteholders may be unable to effect a transfer of servicing. In the event that the Indenture Trustee is unwilling or unable to so act, it may appoint, or petition a court of competent jurisdiction for the appointment of, a successor with a net worth of at least $25,000,000 and whose regular business includes the servicing of Receivables. The Indenture Trustee may make such arrangements for compensation to be paid, which in no event may be greater than the servicing compensation to the Servicer under the Sale and Servicing Agreement. In no event will the Indenture Trustee be liable for any servicing fee or for any differential between the amount of the servicing fee paid to TMCC, as Servicer, and the amount necessary to induce any successor Servicer to act as successor Servicer. Notwithstanding any termination of the Servicer, the Servicer will be entitled to payment of certain amounts payable to it prior to such termination for services rendered prior to such termination.
Waiver of Past Defaults
The holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), acting together as a single class, may, on behalf of all such Noteholders, waive any default by the Servicer in the performance of its obligations under the Sale and Servicing Agreement and its consequences, except a Servicer Default in making any required deposits to or payments from any of the Trust Accounts in accordance with the Sale and Servicing Agreement. Upon any such waiver of a past default, such Servicer Default will cease to exist and will be deemed to have been remedied. No such waiver will impair such Noteholders’ rights with respect to subsequent defaults.
Amendment
Each of the Transfer and Servicing Agreements may be amended by the parties thereto (including, in the case of the Sale and Servicing Agreement, with the consent of the Owner Trustee in the event that it would be affected by such amendment), without the consent of the Securityholders, to cure any ambiguity, to correct or supplement any provisions in the Transfer and Servicing Agreements or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of such Transfer and Servicing Agreements or of modifying in any manner the rights of the Noteholders; provided, that either (i) an officer’s certificate has been delivered by the Servicer to the Indenture Trustee certifying that such officer reasonably believes that such amendment will not materially and adversely affect the interest of any Noteholder or (ii) the Rating Agency Condition has been satisfied with respect to such amendment. Each Transfer and Servicing Agreement may also be amended by the parties thereto, without the consent of the Securityholders, for the purpose of conforming the provisions in such agreement to the descriptions thereof contained in this prospectus.
Each Transfer and Servicing Agreement may also be amended by the parties thereto (including, in the case of the Sale and Servicing Agreement, with the consent of the Owner Trustee in the event that it would be affected by such amendment) without the consent of any Securityholder for the purpose of changing the formula or percentage for determining the Specified Reserve Account Balance, the manner in which the Reserve Account is funded, changing the remittance schedule for deposit of collections in accounts or changing the definition of Eligible Investments if the Rating Agency Condition has been satisfied with respect to such amendment.
The Transfer and Servicing Agreements may also be amended by the parties thereto (including, in the case of the Sale and Servicing Agreement, with the consent of the Owner Trustee in the event that it would be affected by such amendment) with the consent of the Indenture Trustee and with prior notice to the Rating Agencies, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of any such agreement or of modifying in any manner the rights of the Securityholders under such agreement; provided, that if the interests of the Noteholders are materially and adversely affected, the holders of Notes evidencing not less than a majority of the aggregate principal amount of the Notes of the Controlling Class then outstanding (excluding for such purposes the aggregate outstanding principal amount of any Notes held of record or beneficially owned by TMCC, TAFR LLC or any of their affiliates), acting together as a single class, have consented to such amendment.
However, no amendment to a Transfer and Servicing Agreement may (x) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the related Receivables or distributions that are required to be made for the benefit of such Securityholders without the consent of all Securityholders adversely affected thereby, or (y) reduce the percentage of the Notes or the Certificate which are required to consent to any such amendment without the consent of the Securityholders adversely affected thereby; provided, that any amendment referred to in clause (x) or (y) above will be deemed to not adversely affect any Class A Noteholder if the Rating Agency Condition has been satisfied with respect to such amendment. No amendment referred to in clause (x) in the immediately preceding sentence will be permitted unless an officer’s certificate has been delivered by the Servicer to the Indenture Trustee certifying that such officer reasonably believes that such proposed amendment will not materially and adversely affect the interest of any such Noteholder whose consent was not obtained.
For additional information regarding the modification of the Indenture, see “Description of the Notes—Indenture” in this prospectus.
Non-Petition
The Trust Agreement will provide that the Owner Trustee does not have the power to commence a voluntary proceeding in bankruptcy with respect to the Issuing Entity without the unanimous prior approval of all Certificateholders (including the Depositor) of the Issuing Entity and the delivery to the Owner Trustee by each such Certificateholder (including the Depositor) of a certificate certifying that such Certificateholder reasonably believes that the Issuing Entity is insolvent.
In addition, each Transfer and Servicing Agreement will contain a non-petition clause, whereunder all applicable parties covenant not to institute any bankruptcy or insolvency proceedings (or take any related actions) against either the Issuing Entity or the Depositor at any time in connection with any obligations relating to the Notes or any of the Transfer and Servicing Agreements.
Payment of Notes
Upon the payment in full of all outstanding Notes and the satisfaction and discharge of the Indenture, the Owner Trustee will succeed to all the rights of the Indenture Trustee, and the Certificateholders will succeed to all the rights of the Noteholders, under the Sale and Servicing Agreement, except as otherwise provided in the Sale and Servicing Agreement.
Depositor Liability
Under the Sale and Servicing Agreement, the Depositor will agree to be liable directly to an injured party solely to the extent described in the Sale and Servicing Agreement.
Termination
With respect to the Issuing Entity, the obligations of the Servicer, the Depositor, the Owner Trustee and the Indenture Trustee, as the case may be, pursuant to the Transfer and Servicing Agreements, will terminate upon the earlier of (i) the maturity or other liquidation of the last Receivable and the disposition of any funds on deposit in the Issuing Entity’s accounts and any amounts received upon liquidation of any property remaining in the Issuing Entity and (ii) the payment to Noteholders, if any, and Certificateholders of all amounts required to be paid to them pursuant to the Transfer and Servicing Agreements.
The Indenture Trustee will give written notice of termination to each Noteholder of record. The final distribution to any Noteholder will be made only upon surrender and cancellation of that holder’s Note at any office or agency of the Indenture Trustee specified in the notice of termination. Any funds remaining in the Issuing Entity, after the Indenture Trustee has taken measures to locate Noteholders as described in the Sale and Servicing Agreement or Indenture and those measures have failed, will be distributed, subject to applicable law, as provided in the Indenture or the Trust Agreement, as applicable.
Upon termination of the Issuing Entity, the Owner Trustee (acting at the direction of the Certificateholders) will, or will direct the Indenture Trustee to, promptly sell the assets of the Issuing Entity (other than the Trust Accounts) in a commercially reasonable manner and on commercially reasonable terms. The proceeds from any such sale, disposition or liquidation of the Trust Estate of the Issuing Entity will be treated as collections on the Receivables and deposited in the Collection Account. With respect to the Issuing Entity, if the proceeds from the liquidation of the Trust Estate and any amounts on deposit in the accounts of the Issuing Entity and the Collection Account are not sufficient to pay the Notes in full, the amount of principal returned to Noteholders will be reduced and some or all of such Noteholders will incur a loss.
Any outstanding Notes will be redeemed concurrently with any of the events specified above and the subsequent payment to the Certificateholders of all amounts required to be paid to them pursuant to the Trust Agreement will effect early retirement of the Certificate.
Administration Agreement
Pursuant to the Administration Agreement, the Administrator will agree, to the extent provided in such Administration Agreement, to perform all of its duties as Administrator and certain administrative obligations of the Issuing Entity. As compensation for the performance of such obligations, the Administrator will be entitled to a monthly administration fee, which will be paid to it by the Servicer from the Total Servicing Fee.
The Administrator may not resign or be removed until (i) a successor administrator is appointed by the Issuing Entity, (ii) such successor administrator has agreed in writing to be bound by the terms of the Administration Agreement in the same manner as the Administrator and (iii) the Rating Agency Condition has been satisfied in respect of such action.
Under the circumstances specified in the Administration Agreement, any entity into which the Administrator may be merged or consolidated, or any entity resulting from any merger or consolidation to which the Administrator is a party, or any entity succeeding to all or substantially all of the business of the Administrator will be the successor of the Administrator under such Administration Agreement.
The Administration Agreement may be amended by a written amendment signed by the Issuing Entity, the Administrator, the Owner Trustee and the Indenture Trustee, but without the consent of the Noteholders or the Certificateholders, for the purpose of adding any provisions to or modifying or changing in any manner or eliminating any of the provisions of the Administration Agreement; provided, however, that an officer’s certificate is delivered by the Servicer to the Indenture Trustee in connection with such amendment certifying that either (i) such officer reasonably believes such amendment will not, adversely affect in any material respect the interests of any Noteholder or (ii) the Rating Agency Condition has been satisfied with respect to such amendment. The Administration Agreement may also be amended by the parties thereto, without the consent of the Securityholders, for the purpose of conforming the provisions in the Administration Agreement to the descriptions thereof contained in this prospectus.
Investor Communications
A Noteholder or a Note Owner may send a written request to the Administrator stating that the Noteholder or Note Owner is interested in communicating with other Noteholders and Note Owners about the possible exercise of rights under the transaction documents. The Administrator has agreed in the Administration Agreement to include in the Form 10-D for any Collection Period any written request received by the Administrator during that Collection Period from a Noteholder or Verified Note Owner to communicate with other Noteholders and Note Owners regarding exercising their rights under the transaction documents.
Upon receipt of such a request, the Administrator will include in the Form 10-D for the relevant Collection Period the following information:
| • | the name of the requesting Noteholder or Verified Note Owner, |
| • | the date the request was received, |
| • | a statement that the Administrator has received the request from that Noteholder or Verified Note Owner that it is interested in communicating with other Noteholders and Note Owners about the possible exercise of rights under the transaction documents, and |
| • | a description of the method by which the other Noteholders and Note Owners may contact the requesting Noteholder or Verified Note Owner. |
The Administrator is not required to include any additional information in the Form 10-D, and is required to disclose a Noteholder’s or a Verified Note Owner’s request only where the communication relates to the exercise by a Noteholder or a Verified Note Owner of its rights under the transaction documents. The expenses of administering the foregoing investor communication provisions will be the responsibility of the Administrator.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
General
The transfer of the Receivables to the Issuing Entity and the pledge of the Receivables to the Indenture Trustee, the perfection of the interests in the Receivables and the enforcement of rights to realize on the Financed Vehicles as collateral for the Receivables are subject to a number of federal and state laws, including the UCC as in effect in various states. The Servicer and the Depositor will take the actions described below to perfect the rights of the Indenture Trustee in the Receivables. If another party purchases (including the taking of a security interest in) the Receivables for new value in the ordinary course of its business, without actual knowledge of the Issuing Entity’s interest, and takes possession or, in the case of electronic Receivables, control of the Receivables, that purchaser would acquire an interest in the Receivables superior to the interest of the Issuing Entity and the Indenture Trustee.
Security Interests
General. In states in which retail installment sales contracts such as the Receivables evidence the credit sale of cars, crossover utility vehicles, light-duty trucks and sport utility vehicles by dealers to Obligors, the contracts also constitute personal property security agreements and include grants of security interests in the vehicles under the UCC in effect in the applicable state(s). Perfection of security interests in financed cars, crossover utility vehicles, light-duty trucks and sport utility vehicles is generally governed by the motor vehicle registration laws of the state in which the vehicle is located. In most states, a security interest in a car, crossover utility vehicle, light-duty truck or sport utility vehicle is perfected by obtaining possession of the certificate of title to the Financed Vehicle or by a notation of the secured party’s lien on the vehicle’s certificate of title, as applicable.
All retail installment sales contracts acquired by TMCC from Dealers name TMCC as obligee or assignee and as the secured party. TMCC’s possession of tangible contracts and its control of electronic contracts perfects its interest in the contracts against the Dealers and their creditors and also provides TMCC priority over any prior secured creditor, such as an inventory financer, that has a security interest in the contracts. TMCC also takes all actions necessary under the laws of the state in which the related Financed Vehicle is located to perfect its security interest in that Financed Vehicle, including, where applicable, having a notation of its lien recorded on the related certificate of title or with the department of motor vehicles of such state and, where applicable, obtaining possession
of that certificate of title. Because TMCC continues to service the contracts as Servicer under the Sale and Servicing Agreement, the Obligors on the contracts will not be notified of the sale from TMCC to the Depositor or the sale from the Depositor to the Issuing Entity.
Perfection. Pursuant to the Receivables Purchase Agreement, TMCC will sell and assign its interest in the Receivables, including its security interest in the Financed Vehicles to the Depositor and, pursuant to the Sale and Servicing Agreement, the Depositor will sell and assign its interest in the Receivables, including its security interest in the Financed Vehicles to the Issuing Entity. The Issuing Entity will pledge its interest in the Receivables, including its security interest in the Financed Receivables to the Indenture Trustee. UCC financing statements with respect to the transfer to the Depositor of TMCC’s interest in the Receivables, including its security interest in the Financed Vehicles, the transfer to the Issuing Entity of the Depositor’s interest in the Receivables, including its security interest in the Financed Vehicles and the transfer to the Indenture Trustee of the Issuing Entity’s interest in the Receivables, including its security interest in the Financed Vehicles will be filed with the appropriate governmental authorities. However, because of the administrative burden and expense, none of TMCC, the Depositor, the Issuing Entity or the Indenture Trustee will amend any certificate of title to identify the Issuing Entity or the Indenture Trustee as the new secured party on such certificate of title relating to a Financed Vehicle. The Servicer will continue to hold any certificates of title relating to the vehicles in its possession as custodian for the Depositor and the Issuing Entity pursuant to the Sale and Servicing Agreement.
The requirements for the creation, perfection, transfer and release of liens in Financed Vehicles generally are governed by state law and thus vary on a state-by-state basis. Failure to comply with these detailed requirements could result in liability to the Issuing Entity or the release of the lien on the vehicle or other adverse consequences.
In most states, an assignment of contracts and interests in motor vehicles such as that under the Receivables Purchase Agreement or the Sale and Servicing Agreement is an effective conveyance of a security interest and the assignee succeeds thereby to the assignor’s rights as secured party. In those states, the Issuing Entity will have a perfected security interest in the vehicles even though the Issuing Entity’s or the Indenture Trustee’s security interest will not be noted on a vehicle’s certificate of title, as discussed above. In those states, in the absence of fraud or forgery by the vehicle owner or the Servicer or administrative error by state or local agencies, the notation of TMCC’s lien on the certificates of title will be sufficient to protect the Issuing Entity against the rights of subsequent purchasers of a Financed Vehicle or subsequent lenders who take a security interest in a Financed Vehicle. However, the security interest of the Issuing Entity and the Indenture Trustee in the vehicle could be defeated through fraud or forgery by the vehicle owner or the Servicer or administrative error by state or local agencies because neither the Issuing Entity nor the Indenture Trustee will be listed as lienholder on the certificates of title. For example, the State of New York passed legislation allowing a dealer of used motor vehicles to have the lien of a prior lienholder in a motor vehicle released, and to have a new certificate of title with respect to that motor vehicle reissued without the notation of the prior lienholder’s lien, upon submission to the Commissioner of the New York Department of Motor Vehicles of evidence that the prior lien has been satisfied without any signature or formal release by the prior lienholder. It is possible that, as a result of fraud, forgery, negligence or error, a lien on a Financed Vehicle could be released without prior payment in full of the Receivable. In the other states, the amendment of any lien noted on a vehicle’s certificate of title is required to effectively convey the related security interest. In the Receivables Purchase Agreement, TMCC will represent and warrant, and in the Sale and Servicing Agreement, the Depositor will represent and warrant, that it has taken all action necessary to obtain a perfected security interest in each Financed Vehicle. If there are any Financed Vehicles as to which TMCC failed to obtain and assign to the Depositor a perfected security interest, the security interest of the Depositor in the Financed Vehicles would be subordinate to, among others, subsequent purchasers of the Financed Vehicles and holders of perfected security interests in the Financed Vehicles. To the extent that such failure has a material and adverse effect on the Issuing Entity’s interest in the related Receivables, it would constitute a breach of the warranties of TMCC under the Receivables Purchase Agreement or the Depositor under the Sale and Servicing Agreement, as applicable. Accordingly, pursuant to the Sale and Servicing Agreement, the Depositor would be required to repurchase the related Warranty Receivable from the Issuing Entity and, pursuant to the Receivables Purchase Agreement, TMCC would be required to purchase that Warranty Receivable from the Depositor, in each case unless the breach was cured by the last day of the second Collection Period following the Collection Period in which the Depositor discovers or receives notice of such breach. Pursuant to the Sale and Servicing Agreement, the Depositor will assign its rights to the Issuing Entity or cause TMCC to purchase the Warranty Receivable under the Receivables Purchase Agreement. For additional information, you should refer to “Repurchases of Receivables” and “Risk Factors—Risks Primarily Related to the Bankruptcy and Insolvency of Transaction Parties and Perfection
of Security Interests—The issuing entity’s interests in financed vehicles may be unenforceable or defeated” in this prospectus.
Continuity of Perfection in Financed Vehicles. Under the laws of most states, the perfected security interest in a vehicle would continue for up to four months after the vehicle is moved to and re-registered by its owner in a state that is different from the one in which it is initially registered. A majority of states generally require surrender of a certificate of title to re-register a vehicle. In those states that require a secured party to hold possession of the certificate of title to maintain perfection of the security interest, the secured party would learn of the re‑registration through the Obligor’s request under the related installment sales contract that the secured party surrenders possession of the certificate of title. In the case of vehicles registered in states providing for the notation of a lien on the certificate of title but not possession by the secured party, the secured party would receive notice of surrender from the state of re‑registration if the security interest is noted on the certificate of title. Thus, in either case, there are procedural safeguards in place to provide the secured party with notice of re-registration and an opportunity to re‑perfect its security interest in the vehicle in the state of relocation. However, these procedural safeguards will not protect the secured party if through fraud, forgery or administrative error, the debtor procures a new certificate of title that does not list the secured party’s lien. Additionally, in states that do not require a certificate of title for registration of a motor vehicle, re‑registration could defeat perfection. In the ordinary course of servicing the Receivables, TMCC will take steps to effect re-perfection upon receipt of notice of re-registration or information from the Obligor as to relocation. Similarly, when an Obligor sells a Financed Vehicle, TMCC must surrender possession of the certificate of title or will receive notice as a result of its lien noted on the certificate of title and accordingly will have an opportunity to require satisfaction of the related Receivable before release of the lien. Under the Sale and Servicing Agreement, the Servicer will be obligated to take appropriate steps, at the Servicer’s expense, to maintain perfection of security interests in the Financed Vehicles and will be obligated to purchase the related Receivable if it fails to do so and that failure has a material and adverse effect on the Issuing Entity’s interest in the Receivable.
Priority of Liens in Financed Vehicles Arising by Operation of Law. Under the laws of most states (including California), liens for repairs performed on a motor vehicle and liens for unpaid taxes take priority over even a perfected security interest in a financed vehicle. The Code also grants priority to specified federal tax liens over the lien of a secured party. The laws of some states and federal law permit the confiscation of vehicles by governmental authorities under some circumstances if used in unlawful activities, which may result in the loss of a secured party’s perfected security interest in the confiscated vehicle. For additional information, you should refer to “—Forfeiture for Drug, RICO and Money Laundering Violations” in this prospectus. TMCC will represent and warrant to the Depositor in the Receivables Purchase Agreement, and the Depositor will represent and warrant to the Issuing Entity in the Sale and Servicing Agreement, that, as of the Closing Date, each security interest in a Financed Vehicle is prior to all other present liens (other than tax liens and any other liens that arise by operation of law) upon and security interests in such Financed Vehicle. However, liens for repairs or taxes could arise, or the confiscation of a Financed Vehicle could occur, at any time during the term of a Receivable. No notice will be given to the Owner Trustee, the Indenture Trustee, any Noteholders or the Certificateholders if a lien arises or confiscation occurs which would not give rise to the Depositor’s repurchase obligation under the Sale and Servicing Agreement or TMCC’s repurchase obligation under the Receivables Purchase Agreement.
Repossession of Financed Vehicles
In the event of default by an Obligor, the holder of the related retail installment sales contract has all the remedies of a secured party under the UCC as in effect in the applicable state, except where specifically limited by other state laws. Among the UCC remedies, the secured party has the right to repossess by means of self‑help, unless it would constitute a breach of the peace or is otherwise limited by applicable state law. Unless a vehicle financed by TMCC is voluntarily surrendered, self-help repossession is the method employed by TMCC in most states and is accomplished simply by retaking possession of the Financed Vehicle. In cases where an Obligor objects or raises a defense to repossession, or if otherwise required by applicable state law, a court order must be obtained from the appropriate state court, and that vehicle must then be recovered in accordance with that order. In some jurisdictions, the secured party is required to notify that Obligor of the default and the secured party’s intent to repossess the collateral and to give that Obligor a time period within which to cure the default prior to repossession. In some states, an Obligor has the right to reinstate its contract and recover the collateral by paying the delinquent installments and other amounts due.
Notice of Sale of Financed Vehicles; Reinstatement and Redemption Rights
In the event of default by an Obligor under a retail installment sales contract, some jurisdictions require that the Obligor be notified of the default and be given a time period within which to cure the default prior to repossession. Generally, this right of cure may only be exercised on a limited number of occasions during the term of the related contract.
The UCC and other state laws require the secured party to provide an Obligor with reasonable notice of the date, time and place of any public sale and/or the date after which any private sale of the collateral, such as a Financed Vehicle, may be held. In most states, under certain circumstances after any such financed vehicle has been repossessed, the related Obligor may reinstate the related contract by paying the delinquent installments and other amounts due. Additionally, in most states, an Obligor has the right to redeem the collateral prior to actual sale by paying the secured party the unpaid principal balance of the obligation, accrued interest on the obligation plus reasonable expenses for repossessing, holding and preparing the collateral for disposition and arranging for its sale, plus, in some jurisdictions, reasonable attorneys’ fees. In some states, an Obligor has the right to redeem the collateral prior to actual sale by payment of only delinquent installments or the unpaid balance.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the vehicles generally will be applied first to the expenses of resale and repossession and then to satisfaction of the indebtedness. In the event that net proceeds from resale do not cover the full amount of the indebtedness, a deficiency judgment, which is a personal judgment against the Obligor, for the shortfall can be sought in those states that do not prohibit or limit such judgments. In addition to the notice requirement described above, the UCC requires that every aspect of the sale or other disposition, including the method, manner, time, place and terms, be “commercially reasonable.” Generally, courts have held that when a sale is not “commercially reasonable,” the secured party loses its right to a deficiency judgment. However, because a defaulting Obligor can be expected to have very little capital or sources of income available following repossession, in many cases, it may not be useful to seek a deficiency judgment or, if one is obtained, it may be settled at a significant discount or be uncollectible. In addition, the UCC permits the Obligor or other interested party to recover for any loss caused by noncompliance with the provisions of the UCC. Also, prior to a sale, the UCC permits the Obligor or other interested person to prohibit the secured party from disposing of the collateral if it is established that the secured party is not proceeding in accordance with the “default” provisions under the UCC.
Occasionally, after resale of a repossessed vehicle and payment of all expenses and indebtedness, there is a surplus of funds. In that case, the UCC requires the creditor to remit the surplus to any holder of a subordinate lien with respect to that vehicle or, if no such lienholder exists, the UCC requires the creditor to remit the surplus to the Obligor.
Certain Bankruptcy Considerations
In structuring the transactions contemplated in this prospectus, the Depositor has taken steps that are intended to make it unlikely that the voluntary or involuntary application for relief by TMCC under the U.S. Bankruptcy Code (the “Bankruptcy Code”) or similar applicable state laws (collectively, “Insolvency Laws”) will result in consolidation of the assets and liabilities of the Issuing Entity with those of TMCC or the Depositor. These steps include the creation of both the Depositor as a wholly-owned, limited purpose subsidiary pursuant to a limited liability company agreement containing certain limitations (including requiring that the Depositor must at all times have at least one “Independent Manager” and restrictions on the nature of the Depositor’s business and on its ability to commence a voluntary case or proceeding under any Insolvency Law without the affirmative vote of a majority of its managers, including each Independent Manager) and the Issuing Entity as a wholly-owned, limited purpose subsidiary pursuant to the Trust Agreement containing certain limitations (including restrictions on the nature of the Issuing Entity’s business and on its ability to commence a voluntary case or proceeding under any Insolvency Law). However, delays in payments on the Notes and possible reductions in the amount of those payments could occur if:
| 1. | a court were to conclude that the assets and liabilities of the Issuing Entity should be consolidated with those of TMCC or the Depositor in the event of the application of applicable Insolvency Laws to TMCC or the Depositor; |
| 2. | a filing were made under any Insolvency Law by or against the Depositor or the Issuing Entity; and |
| 3. | an attempt were made to litigate any of the foregoing issues. |
On the Closing Date, counsel to the Depositor will give an opinion to the effect that, based on a reasoned analysis of analogous case law (although there is no case law directly on point), and, subject to facts, assumptions and qualifications specified in the opinion and applying the principles described in the opinion, in the event of a voluntary or involuntary bankruptcy proceeding in respect of the Depositor under Title 11 of the Bankruptcy Code, the property of the Issuing Entity would not properly be substantively consolidated with the property of the estate of the Depositor. Among other things, that opinion will assume that each of the Depositor and the Issuing Entity will follow specified procedures in the conduct of its affairs, including maintaining records and books of account separate from those of the other, refraining from commingling its assets with those of the other, and refraining from holding itself out as having agreed to pay, or being liable for, the debt of the other. The Depositor and the Issuing Entity intend to follow these and other procedures related to maintaining their separate corporate identities. However, there can be no assurance that a court would not conclude that the assets and liabilities of the Issuing Entity should be consolidated with those of the Depositor.
TMCC, the Depositor and the Issuing Entity will treat the transactions described in this prospectus as a sale of the Receivables from TMCC to the Depositor and from the Depositor to TMCC, in order to reduce the likelihood that the automatic stay provisions of the Bankruptcy Code would apply to the Receivables in the event that TMCC or the Depositor were to become a debtor in a bankruptcy proceeding. TMCC and the Depositor will represent and warrant in the Receivables Purchase Agreement and the Sale and Servicing Agreement, respectively, that each sale of the Receivables to the Depositor and the Issuing Entity is a valid sale. Notwithstanding the foregoing, if TMCC or the Depositor were to become a debtor in a bankruptcy proceeding, a court could take the position that the sale of Receivables to the Issuing Entity should instead be treated as a pledge of those Receivables to secure a borrowing by TMCC or the Depositor. In addition, if the transfer of Receivables to the Issuing Entity is treated as a pledge instead of a sale, a tax or government lien on the property of TMCC or the Depositor arising before the transfer of a Receivable to the Issuing Entity may have priority over the Issuing Entity’s interest in that Receivable. In addition, while TMCC is the Servicer, cash collections on the Receivables may be commingled with funds of TMCC and, in the event of a bankruptcy of TMCC, the Issuing Entity may not have a perfected ownership interest in those collections and the Indenture Trustee may not have a perfected security interest in those collections.
Dodd-Frank Act Orderly Liquidation Authority Provisions
General. Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), among other things, gives the FDIC authority to act as receiver of certain bank holding companies, financial companies and their respective subsidiaries in specific situations as described in more detail below. This authority is referred to as the FDIC’s Orderly Liquidation Authority provisions (“OLA”) of the Dodd-Frank Act. The proceedings, standards, powers of the FDIC as receiver and many substantive provisions of the OLA differ from those of the Bankruptcy Code in several respects. In addition, because the FDIC has yet to use OLA in any receivership, it is unclear what impact these provisions will have on any particular company, including TMCC, the Depositor, the Issuing Entity or any of their respective creditors.
Potential Applicability to TMCC, the Depositor and the Issuing Entity. There is uncertainty about which companies will be subject to the OLA rather than the Bankruptcy Code. For a company to become subject to the OLA, the Secretary of the Treasury (in consultation with the President of the United States) must determine, among other things, that such company is in default or in danger of default, that the company’s failure and its resolution under the Bankruptcy Code “would have serious adverse effects on financial stability in the United States,” that no viable private sector alternative is available to prevent the default of the company and that an OLA proceeding would avoid or mitigate these adverse effects. In addition, certain financial companies with $50 billion or more in assets, which could include TMCC, are potentially subject to assessments under the OLA.
TMCC’s senior unsecured debt is currently assigned an investment grade rating. TMCC’s business is generally limited to providing retail financing, dealer financing and certain other financial products and services to vehicle and industrial equipment dealers and their customers and marketing, underwriting and administering voluntary protection product contracts related to covering certain risks of customers. TMCC has many competitors in these businesses with substantial resources. Notwithstanding the foregoing, there can be no assurance that circumstances will not change in the future or that, regardless of the nature and scope of TMCC’s business and competitive market, the Secretary of the Treasury would not determine that the failure of TMCC and its resolution under the Bankruptcy Code would have serious adverse effects on financial stability in the United States.
Under certain circumstances, if TMCC were determined to be a “covered financial company,” the Issuing Entity or the Depositor could also be subject to the provisions of the OLA as a “covered subsidiary” of TMCC. For a covered subsidiary to be considered a covered financial company for purposes of the OLA and therefore be subject to receivership under the OLA, (1) the FDIC would have to be appointed as receiver for TMCC under the OLA as described above, and (2) the FDIC and the Secretary of the Treasury would have to jointly determine that (a) the Issuing Entity or the Depositor, as applicable, is in default or in danger of default, (b) appointment of the FDIC as receiver of the covered subsidiary would avoid or mitigate serious adverse effects on the financial stability or economic conditions of the United States and (c) such appointment would facilitate the orderly liquidation of TMCC. To reduce the likelihood that the Issuing Entity or the Depositor would be subject to the OLA, the Issuing Entity does not intend to issue non-investment grade debt and the Depositor will not issue any debt. Moreover, the Issuing Entity will own a relatively small amount of the Receivables originated and serviced by TMCC and the Issuing Entity and the Depositor will be structured as separate legal entities from TMCC and other issuing entities sponsored by TMCC. Notwithstanding the foregoing, because of the novelty of the Dodd-Frank Act and the OLA provisions, the uncertainty of the Secretary of the Treasury’s determination and the fact that such determination would be made in the future under potentially different circumstances, no assurance can be given that the OLA provisions would not apply to TMCC, the Issuing Entity or the Depositor or, if they were to apply, that the timing and amounts of payments to the Noteholders would not be less favorable than under the Bankruptcy Code.
FDIC’s Repudiation Power Under the OLA. If the FDIC were appointed receiver of TMCC or of a covered subsidiary, including the Issuing Entity or the Depositor, under the OLA, the FDIC would have various powers under the OLA, including the power to repudiate any contract to which TMCC or such covered subsidiary was a party, if the FDIC determined that performance of the contract was burdensome to the estate and that repudiation would promote the orderly administration of TMCC’s or such covered subsidiary’s affairs, as applicable. In January 2011, in response to questions regarding whether the FDIC would apply its repudiation power under Section 210(c) of the Dodd-Frank Act to transfers of assets where the assets would not be treated as property of the estate under the Bankruptcy Code, the then-Acting General Counsel of the FDIC, later appointed as General Counsel (the “FDIC Counsel”), issued an advisory opinion letter (the “FDIC Counsel Opinion”) clarifying, among other things, its intended application of the FDIC’s repudiation power under the OLA. The FDIC Counsel Opinion states that the Dodd-Frank Act does not change the existing law governing the separate existence of separate entities under other applicable law and thus, in the FDIC Counsel’s opinion, the FDIC, as receiver for a covered financial company (which could include TMCC or its subsidiaries (including the Depositor or the Issuing Entity)), cannot repudiate a contract or lease of an entity unless (1) it has been appointed as receiver for that entity or (2) the separate existence of that entity may be disregarded under other applicable law. In addition, the FDIC Counsel Opinion states the FDIC Counsel’s opinion that, until such time as the FDIC Board of Directors adopts a regulation further addressing the application of Section 210(c) of the Dodd-Frank Act, if the FDIC were to become receiver for a covered financial company (which could include TMCC or its subsidiaries (including the Depositor or the Issuing Entity)), the FDIC will not, in the exercise of its authority under Section 210(c) of the Dodd-Frank Act, reclaim, recover, or recharacterize as property of such covered financial company or claim receivership of any asset transferred by such covered financial company prior to the end of the applicable transition period of a regulation, provided that such transfer satisfies the conditions for the exclusion of such assets from the property of the estate of such covered financial company under the Bankruptcy Code. Although this advisory opinion does not bind the FDIC or its Board of Directors, and could be modified or withdrawn in the future, the advisory opinion also states that if further regulations affecting the statutory power to disaffirm or repudiate contracts are implemented the FDIC Counsel will recommend that the FDIC Board of Directors incorporates a transition period of 90 days for any such regulations. Subsequent to the advisory opinion, the FDIC has issued regulations implementing OLA; none of those regulations alters or contradicts the views of FDIC Counsel in the advisory opinion regarding the power of the FDIC to disaffirm or repudiate contracts. The FDIC Counsel Opinion does not bind the FDIC or its Board of Directors, and could be modified or withdrawn in the future. To the extent any future regulations or subsequent FDIC actions in an OLA proceeding involving TMCC or its subsidiaries (including the Depositor or the Issuing Entity) are contrary to the FDIC Counsel Opinion, payment or distributions of principal and interest on the Securities issued by the Issuing Entity could be delayed or reduced.
As discussed above, we will structure each transfer of Receivables under the Receivables Purchase Agreement and the Sale and Servicing Agreement with the intent that it would be characterized as a legal true sale under applicable state law and that the Receivables would not be included in the transferor’s bankruptcy estate under the Bankruptcy Code. If the transfers are so characterized, based on the FDIC Counsel Opinion and applicable law, the FDIC would not be able to recover the transferred Receivables using its repudiation power. However, if the FDIC were to successfully assert that a transfer of Receivables was not a legal true sale and should instead be
characterized as a transfer of a security interest to secure loans, and if the FDIC repudiated those loans, the purchasers of the Receivables or the Noteholders, as applicable, would, in lieu of their interests in the Receivables themselves, have a claim for their “actual direct compensatory damages,” which claim would be no less than the amount lent plus interest accrued to the date the FDIC was appointed receiver. In addition, to the extent that the value of the collateral securing the loan exceeds such amount, the purchaser or the Noteholders, as applicable, would also have a claim for any interest that accrued after such appointment at least through the date of repudiation or disaffirmance. In addition, even if an initial determination by the FDIC that the transfers were not legal true sales or that the FDIC could use its repudiation power to recover the Receivables were reversed by a court, Noteholders could suffer delays in the payments on their Notes.
If the FDIC were appointed receiver of TMCC or of a covered subsidiary (including the Issuing Entity or the Depositor) under the OLA, the FDIC’s repudiation power would also extend to continuing obligations of TMCC or such covered subsidiary, as applicable, including such party’s obligations to repurchase Warranty Receivables as well as its obligation to service the Receivables. If the FDIC were to exercise this repudiation power, Noteholders would not be able to compel TMCC or any applicable covered subsidiary to repurchase Warranty Receivables and instead would have a claim for damages in TMCC’s or that covered subsidiary’s receivership, as applicable, and thus would suffer delays and may suffer losses of payments on their Notes. Noteholders would also be prevented from replacing the Servicer during a stay in connection with these proceedings. In addition, if the FDIC were to repudiate TMCC’s obligations as Servicer, there may be disruptions in servicing as a result of a transfer of servicing to a third-party, which could cause Noteholders to suffer delays or losses of payments on their Notes. In addition, there are other statutory provisions under the OLA enforceable by the FDIC under which, if the FDIC takes action, payments or distributions of principal and interest on the Notes could be delayed or reduced.
In addition, under the OLA, none of the parties to the Receivables Purchase Agreement, the Sale and Servicing Agreement, the Administration Agreement or the Indenture could exercise any right or power to terminate, accelerate, or declare a default under those contracts, or otherwise affect TMCC’s or a covered subsidiary’s rights under those contracts without the FDIC’s consent for 90 days after the FDIC is appointed as receiver. Similar to an “automatic stay” in a bankruptcy proceeding, during the same period, the FDIC’s consent would also be required for any attempt to obtain possession of or exercise control over any property of TMCC or of a covered subsidiary.
If the Issuing Entity were to become subject to the OLA, the FDIC may repudiate the debt of the Issuing Entity. In such an event, the Noteholders would have a secured claim in the receivership of the Issuing Entity for “actual direct compensatory damages” as described above, and payments on the Notes would be delayed and could be reduced. In addition, for a period of 90 days after a receiver was appointed, Noteholders would be stayed from accelerating the debt or exercising any remedies under the Indenture.
FDIC’s Avoidance Power Under the OLA. Under statutory provisions of the OLA similar to those of the Bankruptcy Code, the FDIC could avoid transfers of Receivables that are deemed “preferential.” On July 15, 2011, the FDIC Board of Directors issued a final rule (the “Final Rule”), which, among other things, clarifies that the treatment of preferential transfers under the OLA was intended to be consistent with, and should be interpreted in a manner consistent with, the related provisions under the Bankruptcy Code. The Final Rule became effective on August 15, 2011. Based on the Final Rule, a transfer of the Receivables perfected by the filing of a UCC financing statement against TMCC, the Depositor and the Issuing Entity as provided in the Transfer and Servicing Agreements would not be avoidable by the FDIC as a preference under the OLA. For additional information, you should refer to “—Certain Bankruptcy Considerations” above.
Consumer Finance Regulation
Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon lenders and servicers involved in consumer finance. These laws and regulations include the Truth in Lending Act and its implementing regulation, Regulation Z, the Equal Credit Opportunity Act and its implementing regulation, Regulation B, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Debt Collections Practices Act, the Magnuson Moss Warranty Act, the Gramm-Leach-Bliley Act, the SCRA and similar state laws protecting servicemembers, the National Consumer Credit Protection Act, the Texas Consumer Credit Code, the Dodd-Frank Act, state adoptions of the National Consumer Act and of the Uniform Consumer Credit Code and state motor vehicle retail installment sales acts and other similar laws. Many states have adopted “lemon laws” that provide redress to consumers who purchase a vehicle that remains out of compliance with its manufacturer’s warranty after a specified number of attempts to correct a problem or a specified time period. Also, state laws impose finance charge ceilings and other restrictions on consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In some cases, this liability could affect an assignee’s ability to enforce consumer finance contracts such as the Receivables.
Any licensing requirements of the Issuing Entity are governed by state and sometimes local law, and thus vary on a jurisdiction-by-jurisdiction basis. For example, the City of New York passed legislation requiring a purchaser of delinquent loans to be licensed as a debt collector. It is not clear what “delinquent” means under that law. It is possible that, as a result of not being properly licensed under a state or local law, the Issuing Entity could be subject to liability or other adverse consequences.
With respect to used vehicles, the Federal Trade Commission’s Rule on Sale of Used Vehicles (the “FTC Rule”) requires all sellers of used vehicles to prepare, complete and display a “Buyers Guide” which explains the warranty coverage for such vehicles. The Federal Magnuson-Moss Warranty Act and state lemon laws may impose further obligations on motor vehicle dealers. Holders of the Receivables may have liability or claims and defenses under those statutes, the FTC Rule and similar state statutes.
The “Holder in Due Course” Rule of the Federal Trade Commission (the “HDC Rule”), the provisions of which are generally duplicated by the Uniform Consumer Credit Code, other statutes or the common law in some states, has the effect of subjecting a seller (and specified creditors and their assignees) in a consumer credit transaction to all claims and defenses which the Obligor in the transaction could assert against the seller of the goods. Liability under the HDC Rule is limited to the amounts paid by the Obligor under the contract, and the holder of the Receivable may also be unable to collect any balance remaining due under that contract from the Obligor.
Most of the Receivables will be subject to the requirements of the HDC Rule. Accordingly, the Issuing Entity, as holder of the Receivables, will be subject to any claims or defenses that the purchaser of an applicable Financed Vehicle may assert against the seller of such Financed Vehicle. For each Obligor, these claims are limited to a maximum liability equal to the amounts paid by the Obligor on the related Receivable. Under most state motor vehicle dealer licensing laws, sellers of motor vehicles are required to be licensed to sell motor vehicles at retail sale. Furthermore, federal odometer regulations promulgated under the Motor Vehicle Information and Cost Savings Act require that all sellers of new and used vehicles furnish a written statement signed by the seller certifying the accuracy of the odometer reading at the time of sale. If the seller is not properly licensed or if a written odometer disclosure statement was not provided to the related Obligor, the Obligor may be able to assert a defense against the seller of the vehicle. If an Obligor were successful in asserting any of those claims or defenses, that claim or defense would evidence a breach of the Depositor’s representations and warranties under the Sale and Servicing Agreement and a breach of TMCC’s warranties under the Receivables Purchase Agreement and would, if the breach materially and adversely affects the Receivable or the interest of the Noteholders, create an obligation of the Depositor and TMCC, respectively, to repurchase the Warranty Receivable unless the breach is cured by the last day of the second Collection Period following the Collection Period in which the Depositor discovers or receives notice of such breach. For additional information, you should refer to “Transfer and Servicing Agreements—Sale and Assignment of Receivables” and “Repurchases of Receivables” in this prospectus.
Courts have applied general equitable principles to secured parties pursuing repossession and litigation involving deficiency balances. These equitable principles may have the effect of relieving an Obligor from some or all of the legal consequences of a default. Any such shortfall, to the extent not covered by amounts payable to the Noteholders from amounts on deposit in the Reserve Account or from coverage provided under any other credit enhancement mechanism, could result in losses to the Noteholders.
The Consumer Financial Protection Bureau (the “CFPB”), has broad rulemaking, supervisory and enforcement authority over entities offering consumer financial services or products, including non-bank companies, such as TMCC (“Covered Entities”). The CFPB’s supervisory authority has focused on fair lending compliance, debt collection, the treatment of customers during the COVID-19 Outbreak, credit reporting, and the marketing and sale of certain optional products, including voluntary protection products financed by TMCC or sold through TMIS.
The CFPB’s supervisory authority permits it to examine Covered Entities for compliance with consumer financial protection laws. These examinations could result in enforcement actions, regulatory fines and mandated changes to TMCC’s business, products, policies and procedures.
The CFPB’s enforcement authority permits it to conduct investigations (which may include a joint investigation with other agencies and regulators) of, and initiate enforcement actions related to, violations of federal consumer financial protection laws. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other types of affirmative relief), or other forms of remediation, and/or impose monetary penalties. The CFPB and the Federal Trade Commission, or the “FTC,” may investigate the products, services and operations of credit providers, including banks and other finance companies engaged in auto finance activities. As a result of such investigations, both the CFPB and the FTC have announced various enforcement actions against lenders in the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if applicable to TMCC or the products, services and operations TMCC offers, may require TMCC to cease or alter certain business practices, which could have a material adverse effect on TMCC’s results of operations, financial condition, and liquidity.
A majority of states (and Puerto Rico) have enacted legislation establishing licensing requirements to conduct financing activities. TMCC must renew these licenses periodically. Most states also impose limits on the maximum rate of finance charges, while other state and federal legislatures are also discussing an all-in rate cap that would include finance charges plus charges on TMCC’s ancillary products such as voluntary protection products. In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on TMCC’s operations in these states if TMCC were unable to pass on increased interest costs to its customers. Some state laws impose rate and other restrictions on credit transactions with customers in active military status in addition to those imposed by the SCRA.
State laws also impose requirements and restrictions on TMCC with respect to, among other matters, required credit application and finance and disclosures, late fees and other charges, the right to repossess a vehicle for failure to pay or other defaults under the retail contract, other rights and remedies TMCC may exercise in the event of a default under the retail contract and other consumer protection matters. Many states are also focusing on cybersecurity and data privacy as areas warranting consumer protection. Some states have passed complex legislation dealing with consumer information, which impacts companies such as TMCC. In some jurisdictions, these laws and regulations provide a private right of action that would allow customers to bring suit directly against TMCC for mishandling their data for certain violations of these laws and regulations.
State regulators are taking a more stringent approach to supervising and regulating providers of financial products and services subject to their jurisdiction. In addition, TMCC is subject to governmental and regulatory examinations, information gathering requests and investigations from time to time. TMCC expects to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future. See “Risk Factors—Risks Primarily Related to Legal and Regulatory Matters—The regulatory environment in which TMCC operates could have an adverse effect on TMCC, the depositor and the issuing entity, which could result in losses or delays in payments on your notes.”
Other Federal Regulation
If the FDIC were appointed receiver of TMCC, the Depositor or the Issuing Entity under the Orderly Liquidation Authority provisions of the Dodd-Frank Act, the FDIC could repudiate contracts deemed burdensome to the estate, including secured debt. TMCC has structured the transfers of the Receivables to the Depositor and the Issuing Entity as a valid and perfected sale under applicable state law and under the U.S. Bankruptcy Code to mitigate the risk of the recharacterization of the sale as a grant of security interest to secure debt of TMCC. Any attempt by the FDIC to recharacterize the transfer of the Receivables as a grant of a security interest to secure debt that the FDIC then repudiates would cause delays in payments or losses on the Notes. In addition, if the Issuing Entity were to become subject to the Orderly Liquidation Authority, the FDIC may repudiate the debt of the Issuing Entity and the Noteholders would have a secured claim in the receivership of the Issuing Entity. Also, if the Issuing Entity were subject to Orderly Liquidation Authority, the Noteholders would not be permitted to accelerate the debt, exercise remedies against the collateral or replace the Servicer without the FDIC’s consent for 90 days after the receiver is appointed. As a result of any of these events, delays in payments on the Notes would occur and possible reductions in the amount of those payments could occur.
No assurances can be given that the liquidation framework for the resolution of “covered financial companies” would not apply to TMCC or its affiliates, including the Depositor and the Issuing Entity.
For additional discussion of how a failure to comply with consumer protection laws may impact the Issuing Entity, the Receivables or your investment in the Notes, see “Risk Factors—Risks Primarily Related to Legal and Regulatory Matters—Receivables that fail to comply with consumer protection laws may be unenforceable, which may result in losses on your investment” in this prospectus.
TMCC periodically performs reviews of its lending and servicing policies and analyzes portfolio-wide data for potential disparities resulting from dealer compensation policies. Depending upon the results of these reviews and analyses or any regulatory agency actions, TMCC may take corrective actions, including modifying the interest rate or making payments with respect to certain Receivables. Certain corrective actions may result in TMCC, as Servicer, being required under the Sale and Servicing Agreement to repurchase the affected Receivables. See “Transfer and Servicing Agreements—Servicing Procedures” in this prospectus for a discussion of purchase obligations of the Servicer.
TMCC and the Depositor will represent and warrant under the Receivables Purchase Agreement and the Sale and Servicing Agreement, as applicable, that each Receivable complies with all requirements of law in all material respects. Accordingly, if an Obligor has a claim against the Issuing Entity for violation of any law and such claim materially and adversely affects the Issuing Entity’s interest in a Receivable, such violation would constitute a breach of the representations and warranties of TMCC under the Receivables Purchase Agreement and the Depositor under the Sale and Servicing Agreement and would create an obligation of TMCC and the Depositor to repurchase the affected Warranty Receivable unless the breach is cured by the last day of the second Collection Period following the Collection Period in which the Depositor discovers or receives notice of such breach. For additional information, you should refer to “Repurchases of Receivables” in this prospectus.
Forfeiture for Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets derived from criminal activity or otherwise tainted, or used in the commission of certain offenses can be seized and ordered forfeited to the United States of America. The offenses that can trigger such a seizure and forfeiture include, among others, violations of the Racketeer Influenced and Corrupt Organizations Act, the Bank Secrecy Act, the anti-money laundering laws and regulations, including the USA Patriot Act of 2001 and the regulations issued pursuant thereto, as well as the narcotic drug laws. In many instances, the United States may seize the property even before a conviction occurs.
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including federal bankruptcy laws and related state laws, may interfere with or affect the ability of a secured party to realize upon collateral or to enforce a deficiency judgment. For example, in a Chapter 13 proceeding under the Bankruptcy Code, a court may prevent a creditor from repossessing a vehicle and, as part of the repayment plan, reduce the amount of the secured indebtedness to the market value of the vehicle at the time of bankruptcy (as determined by the court), leaving the creditor as a general unsecured creditor for the remainder of the indebtedness. A bankruptcy court may also reduce the monthly payments due under a contract or change the rate of interest and time of repayment of the indebtedness.
Under the terms of the SCRA, an Obligor who enters the military service (including members of the Army, Navy, Air Force, Marines, National Guard, and officers of the National Oceanic and Atmospheric Administration and U.S. Public Health Service assigned to duty with the military, on active duty or absent from duty for lawful cause) after the origination of that Obligor’s Receivable (including an Obligor who is a member of the National Guard or is in reserve status at the time of the origination of the Obligor’s Receivable and is later called to active duty) may not be charged interest and fees above an annual rate of 6% during the period of that Obligor’s active duty status after a request for relief by the Obligor. The SCRA provides for extension of payments during a period of service upon request of the Obligor. Interest and fees at a rate in excess of 6% that would have been incurred but for the SCRA are forgiven. The Servicer will modify any Receivable impacted by the SCRA and will be obligated to purchase any such modified Receivable by depositing an amount equal to the remaining outstanding Principal Balance of such Receivable into the Collection Account. In addition, the SCRA and the laws of some states, including California, New York and New Jersey, impose limitations that would impair the ability of the Servicer to repossess the released Financed Vehicle during the Obligor’s period of active duty status and, under certain circumstances, during an additional period thereafter. Thus, if that Receivable goes into default, there may be delays and losses occasioned by the inability to exercise the Issuing Entity’s rights with respect to the Receivable and the related Financed Vehicle in a timely fashion.
Any shortfall pursuant to either of the two preceding paragraphs, to the extent not covered by amounts payable to the Securityholders from amounts on deposit in the Reserve Account or from coverage provided under any other credit enhancement mechanism, could result in losses to the Securityholders. For additional information, you should refer to “Risk Factors—Risks Primarily Related to the Nature of the Notes and the Structure of the Transaction—Prepayments on receivables may cause prepayments on the notes, resulting in reduced returns on your investment and reinvestment risk to you” in this prospectus.
LEGAL PROCEEDINGS
To the knowledge of the Sponsor and the Depositor, there are no legal proceedings pending, or governmental proceedings contemplated, against the Depositor or the Issuing Entity that would be material to holders of any Notes.
To the knowledge of the Sponsor and the Depositor, except for those proceedings described under “Risk Factors—Risks Primarily Related to Legal and Regulatory Matters—The regulatory environment in which TMCC operates could have an adverse effect on TMCC, the depositor and the issuing entity, which could result in losses or delays in payments on your notes” in this prospectus, there are no legal proceedings pending, or governmental proceedings contemplated, against the Sponsor or the Servicer that would be material to holders of any Notes.
For a description of any legal proceedings pending, or governmental proceedings contemplated, against the Trustees that would be material to holders of any Notes, you should refer to “The Trustees” in this prospectus.
ERISA CONSIDERATIONS
Subject to the following discussion, the Class A Notes sold to parties unaffiliated with the Issuing Entity may be acquired by pension, profit-sharing or other employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), individual retirement accounts, Keogh Plans and other plans covered by Section 4975 of the Code, and entities deemed to hold the plan assets of the foregoing (each, a “Plan”). Section 406 of ERISA and Section 4975 of the Code prohibit a Plan from engaging in certain transactions with persons that are “parties in interest” under ERISA or “disqualified persons” under the Code with respect to such Plan. A violation of these “prohibited transaction” rules may result in an excise tax or other penalties and liabilities under ERISA and the Code for such persons or the fiduciaries of the Plan. Title I of ERISA also requires that fiduciaries of a Plan subject to ERISA make investments that are prudent, diversified (except if prudent not to do so) and in accordance with governing plan documents.
Certain transactions involving the Issuing Entity might be deemed to constitute prohibited transactions under ERISA and the Code with respect to a Plan that purchased the Class A Notes if assets of the Issuing Entity were deemed to be assets of a Plan. Under a regulation issued by the United States Department of Labor as effectively modified by Section 3(42) of ERISA (the “Regulation”), the assets of the Issuing Entity would be treated as plan assets of a Plan for the purposes of ERISA and the Code only if the Plan acquired an “equity interest” in the Issuing Entity and none of the exceptions to plan asset treatment contained in the Regulation were applicable. An equity interest is defined under the Regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there is little guidance on the subject, the Issuing Entity believes that those Class A Notes acquired by parties unaffiliated with the Issuing Entity should be treated as indebtedness without substantial equity features for purposes of the Regulation. This determination is based in part upon (i) tax counsel’s opinion that Class A Notes held by parties unaffiliated with the Issuing Entity will be classified as debt for U.S. federal income tax purposes and (ii) the traditional debt features of such Class A Notes, including the reasonable expectation of purchasers of the Notes that they will be repaid when due, as well as the absence of conversion rights, warrants and other typical equity features. Based upon the foregoing and other considerations, and subject to the considerations described below, such Class A Notes may be acquired by a Plan.
However, without regard to whether the Class A Notes are treated as indebtedness for purposes of the Regulation, the acquisition or holding of Class A Notes by or on behalf of a Plan could be considered to give rise to a prohibited transaction if the Issuing Entity, the Owner Trustee, the Indenture Trustee, any Underwriter or certain of their respective affiliates is or becomes a party in interest or a disqualified person with respect to such Plan. In such case, certain exemptions from the prohibited transaction rules could be applicable to the purchase and holding of the Class A 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 95-60, regarding investments by insurance company general accounts; PTCE 91-38, regarding investments by bank collective investment funds; PTCE 96-23, regarding transactions affected by “in-house asset managers”; and PTCE 84-14,
regarding transactions effected by “qualified professional asset managers.” In addition to the class exemptions listed above, there is also a statutory exemption that may be available under Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code for prohibited transactions between a Plan and a person or entity that is a party in interest to such Plan solely by reason of providing services to a Plan (other than a party in interest that is a fiduciary, or its affiliate, that has or exercises discretionary authority or control or renders investment advice with respect to the assets of the Plan involved in such transaction), provided that there is adequate consideration for the transaction. Even if the conditions described in one or more of these exemptions are met, the scope of relief provided by these exemptions might or might not cover all acts which might be construed as prohibited transactions. There can be no assurance that any of these, or any other exemption, will be available with respect to any particular transaction involving the Class A Notes and prospective purchasers that are Plans should consult with their advisors regarding the applicability of any such exemption.
In addition, because the Underwriters, the Owner Trustee, the Indenture Trustee, the Depositor, the Servicer or their affiliates may receive certain benefits in connection with the sale or holding of Class A Notes, the purchase of Class A Notes using plan assets over which any of these parties or their affiliates has investment authority, or renders investment advice for a fee with respect to the assets of the Plan, or is the employer or other sponsor of the Plan, might be deemed to be a violation of a provision of Title I of ERISA or Section 4975 of the Code. Accordingly, Class A Notes may not be purchased using the assets of any Plan if the Underwriter, the Owner Trustee, the Indenture Trustee, the Depositor, the Servicer or their affiliates has investment authority, or renders investment advice for a fee with respect to the assets of the Plan, or is the employer or other sponsor of the Plan, unless an applicable prohibited transaction exemption is available to cover the purchase or holding of the Class A Notes or the transaction is not otherwise prohibited.
Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans are not subject to ERISA requirements; however, governmental, church or non-U.S. plans may be subject to comparable non-U.S., federal, state or local law restrictions.
By acquiring a Class A Note, each purchaser and transferee will be deemed to represent, warrant and covenant that either (i) it is not acquiring such Class A Note with the assets of a Plan or any other plan subject to any law that is substantially similar to the fiduciary responsibility or prohibited transaction provisions of Title I of ERISA or Section 4975 of the Code (“Similar Law”), or (ii) the acquisition, holding and disposition of such Class A Notes does not and will not give rise to a nonexempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or a violation of any Similar Law.
The sale of Class A Notes to a Plan is in no respect a representation that this investment meets all relevant legal requirements with respect to investments by Plans or other plans generally or by a particular Plan or other plan, or that this investment is appropriate for Plans or other plans generally or any particular Plan or other plan.
Prospective Plan investors should consult with their legal advisors concerning the impact of ERISA and Section 4975 of the Code or any Similar Law, the effect of the assets of the Issuing Entity being deemed “plan assets” and the applicability of any applicable exemption prior to making an investment in the Class A Notes. Each Plan fiduciary should determine whether under the fiduciary standards of investment prudence and diversification, an investment in the Class A Notes is appropriate for the Plan, also taking into account the overall investment policy of the Plan and the composition of the Plan’s investment portfolio.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of the anticipated material U.S. federal income tax considerations applicable to the purchase, ownership and disposition of the Class A Notes (which as used in this discussion refers solely to Class A Notes that are not Retained Notes), to the extent it purports to describe provisions of U.S. federal income tax law or legal conclusions with respect thereto, represents the opinion of Morgan, Lewis & Bockius LLP, special tax counsel to the Issuing Entity (“Tax Counsel”), on the material matters associated with those considerations, subject to the qualifications described in this prospectus. The following discussion is based upon current provisions of the Code, the Treasury regulations promulgated under the Code and judicial or ruling authority, all of which are subject
to change, which change may be retroactive. In addition, Tax Counsel has prepared or reviewed the statements under “Summary of Terms—Tax Status” in this prospectus as they relate to U.S. federal income tax matters and under “Material U.S. Federal Income Tax Considerations” in this prospectus and is of the opinion that such statements are correct in all material respects. Such statements are intended as an explanatory discussion of the possible effects of the classification of the Issuing Entity for U.S. federal income tax purposes on investors generally and of related U.S. federal income tax matters affecting investors generally, but do not purport to furnish information in the level of detail or with the attention to the investor’s specific tax circumstances that would be provided by an investor’s own tax adviser. Accordingly, each investor is advised to consult its own tax advisor with regard to the tax considerations applicable to it of investing in Class A Notes.
The discussion does not purport to deal with U.S. federal income tax considerations applicable to all categories of investors, some of which may be subject to special rules, and does not address which forms should be used to report information related to the Class A Notes to the IRS. For example, it does not discuss the tax treatment of Securityholders that are insurance companies, financial institutions, regulated investment companies or dealers in securities. Moreover, there are no cases or IRS rulings on similar transactions involving entities such as the Issuing Entity that issue both equity interests and debt interests issued with terms similar to those of the Notes. As a result, the IRS may disagree with all or with one or more parts of the discussion below. It is suggested that prospective investors consult their own tax advisors in determining the federal, state, local, foreign and any other tax considerations applicable to them of the purchase, ownership and disposition of the Class A Notes.
As used herein, the term “Note Owner” means any Noteholder or beneficial owner of the Class A Notes. The term “U.S. Note Owner” means any Note Owner that is for U.S. federal income tax purposes a U.S. Person. A “Foreign Note Owner” means any Note Owner other than a U.S. Note Owner or entity treated as a partnership for U.S. federal income tax purposes. A “U.S. Person” means: (i) a citizen or resident of the United States, (ii) an entity treated as a corporation for U.S. federal income tax purposes created or organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. Persons have authority to control all substantial decisions of the trust or (b) such trust was in existence on August 20, 1996 and is eligible to elect, and has made a valid election, to be treated as a U.S. Person despite not meeting the requirements of clause (a).
Special rules, not addressed in this discussion, may apply to persons purchasing Class A Notes through entities or arrangements treated for U.S. federal income tax purposes as partnerships, and any partnership purchasing Class A Notes and persons purchasing Class A Notes through a partnership should consult their own tax advisors in that regard.
On the Closing Date, Tax Counsel will deliver its opinion that under current law, assuming the execution of, and compliance with, the Indenture, the Trust Agreement and the other Transfer and Servicing Agreements and subject to the discussion described below, the Issuing Entity will not be classified as an association or a publicly traded partnership, in either case taxable as a corporation for U.S. federal income tax purposes. Further, Tax Counsel will issue an opinion to the Issuing Entity that as of their issuance date, the Class A Notes that are held by parties unaffiliated with the Issuing Entity will be classified as debt for U.S. federal income tax purposes. Note Owners of Class A Notes that are offered by this prospectus will be deemed to agree, by their purchase of such Class A Notes, to treat the Class A Notes as debt for purposes of U.S. federal and state income tax, franchise tax and any other tax measured in whole or in part by income.
An opinion of Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any of the issues discussed below will be sought from the IRS.
Tax Characterization of the Issuing Entity
On the Closing Date, Tax Counsel will deliver its opinion that the Issuing Entity will not be classified as an association or publicly traded partnership that in either case is taxable as a corporation for U.S. federal income tax purposes. This opinion will be based on the assumption that the terms of the Indenture, the Trust Agreement and the other Transfer and Servicing Agreements will be complied with.
If the Issuing Entity were taxable as an association or as a publicly traded partnership that in either case was taxable as a corporation for U.S. federal income tax purposes, the Issuing Entity would be subject to U.S.
federal corporate income tax on its taxable income. The Issuing Entity’s taxable income would include all its income on the receivables, possibly reduced by its interest expense on the Notes. Any such U.S. federal corporate income tax could materially reduce cash available to make payments on the Notes.
The Depositor, the Sponsor, and the Servicer will agree to treat the Issuing Entity (i) if more than one beneficial owner owns the Certificate (and any Notes characterized as equity interests in the Issuing Entity), as a partnership for purposes of U.S. federal and state income tax, franchise tax and any other tax measured in whole or in part by income, with the assets of the partnership being the assets held by the Issuing Entity, the partners of the partnership being the owners of the Certificate (and any Notes characterized as equity interests in the Issuing Entity), and the Notes (other than Notes characterized as equity interests in the Issuing Entity) being debt of the partnership, or (ii) if a single beneficial owner owns the Certificate (and any Notes characterized as equity interests in the Issuing Entity), as an entity disregarded as separate from the beneficial owner of the Certificates (and any Notes characterized as equity interests in the Issuing Entity) for purposes of U.S. federal and state income tax, franchise tax and any other tax measured in whole or in part by income, with the assets of the Issuing Entity and the Notes treated as assets and indebtedness, respectively, of the beneficial owner of the Certificates. However, the proper characterization of the arrangement involving the Issuing Entity, the Notes, the Depositor, the Sponsor, and the Servicer is not clear because there is no legal authority on transactions closely comparable to the transaction described in this prospectus.
Partnership Audit Rules
If the Issuing Entity were treated as a partnership for U.S. federal income tax purposes, rules applicable to the audit of partnerships and entities treated as partnerships for U.S. federal income tax purposes would generally apply. Under these rules, unless an entity elects otherwise, taxes arising from audit adjustments are required to be paid by the entity rather than by its partners or members. The parties responsible for the tax administration of the Issuing Entity will have the authority to utilize, and intend to utilize, any exceptions available under these provisions and any associated Treasury regulations (including any changes thereto or amendments thereof) so that the beneficial owner(s) of the Certificates, to the fullest extent possible, rather than the Issuing Entity itself, will be liable for any taxes arising from audit adjustments to the Issuing Entity’s taxable income if the Issuing Entity is treated as a partnership. It is unclear how any such elections may affect the procedural rules available to challenge any audit adjustment that would otherwise be available in the absence of any such elections.
Tax Consequences to Note Owners
Retained Notes. As noted above, the Retained Notes initially will be retained by the Depositor, and are not being registered or publicly offered hereby. The characterization of the Retained Notes as equity or indebtedness for U.S. federal income tax purposes, and the potential consequences of that characterization, will be determined only when such Retained Notes are transferred to a party unaffiliated with the Issuing Entity. Therefore, as noted above, this discussion will apply only to the Class A Notes that are not Retained Notes.
Treatment of the Class A Notes as Indebtedness. The Depositor and any Note Owners will agree by their purchase of Class A Notes, to treat the Class A Notes as debt for purposes of U.S. federal and state income tax, franchise tax and any other tax measured in whole or in part by income. Tax Counsel will deliver its opinion that as of their issuance date, the Class A Notes held by parties unaffiliated with the Issuing Entity will be classified as debt for U.S. federal income tax purposes. The discussion below assumes this characterization of the Class A Notes is correct.
Tax Consequences to U.S. Note Owners
Stated Interest and Original Issue Discount, Etc. The discussion below assumes that all payments on the Class A Notes are denominated in U.S. Dollars, and that the Class A Notes are not entitled to interest payments with disproportionate, nominal or no principal payments.
Stated interest on a Class A Note will generally be includible in a U.S. Note Owner’s gross income as it accrues or is received in accordance with the U.S. Note Owner’s usual method of accounting for U.S. federal income tax purposes. If, however, any of the Class A Notes are issued with original issue discount (“OID”), the provisions of Sections 1271 through 1273 and 1275 of the Code and Treasury regulations relating to OID (such regulations the “OID Regulations”) will apply to such Notes. Under these provisions and the OID Regulations, U.S. Note Owners (including cash basis U.S. Note Owners) must include any OID on the Class A Note in income under a
constant yield method, resulting in the inclusion of OID in income in advance of the receipt of cash attributable to that income.
A Class A Note will be treated as having been issued with OID to the extent that its “stated redemption price at maturity” exceeds its “issue price” by an amount that equals or exceeds a de minimis amount (0.25 percent of a Class A Note’s stated redemption price at maturity, multiplied by the number of years to maturity, based on the anticipated weighted average life of the Class A Note, determined by using a prepayment assumption (the “Note Prepayment Assumption”) and weighing each payment by reference to the number of complete years following issuance until payment is made for each partial principal payment). In determining whether the Class A Notes were issued with OID, the Depositor expects to use a reasonable assumption regarding prepayments with respect to the Receivables (a “Prepayment Assumption”) to determine the weighted average maturity of the Class A Notes. The Prepayment Assumption that will be used for purposes of computing OID, if any, for U.S. federal income tax purposes is 1.30% ABS. For additional information, you should refer to “Prepayment and Yield Considerations” and “Weighted Average Lives of the Notes” in this prospectus. No representation is made that any Class A Note will prepay in accordance with the Note Prepayment Assumption, nor that the Receivables will prepay in accordance with the Prepayment Assumption or in accordance with any other assumption.
The “issue price” of a Class A Note is the first price at which a substantial amount of the Class A Notes are sold to the public, excluding sales to bond houses, brokers, or organizations acting as underwriters, placement agents or wholesalers. The “stated redemption price at maturity” of a Class A Note is the total of all payments provided on the Class A Note other than payments of “qualified stated interest.” “Qualified stated interest” is generally interest that is unconditionally payable in cash or other property, at fixed intervals of one year or less during the entire term of the instrument based on a single fixed rate or qualifying variable rate – or certain combinations of fixed and qualifying variable rate. “Unconditionally payable” means that reasonable legal remedies exist to compel timely payment or that the terms of the instrument make the possibility of late payment or non-payment sufficiently remote.
While it is anticipated that the interest formula for the Class A Notes will meet the requirements for “qualified stated interest” and that any OID on the Class A Notes will not exceed the de minimis amount, it is possible that the Class A Notes will be issued with more than a de minimis amount of OID. U.S. Note Owners must generally report de minimis OID pro rata as principal payments are received on the Class A Note.
In the case of a debt instrument (such as a Class A Note) as to which the repayment of principal may be accelerated as a result of the prepayment of other obligations securing the debt instrument, under Section 1272(a)(6) of the Code, the periodic accrual of OID is determined by taking into account (i) a reasonable prepayment assumption (generally, the assumption used to price the debt offering), and (ii) adjustments in the accrual of OID when prepayments do not conform to the prepayment assumption. To date, no Treasury regulations have been promulgated under Section 1272(a)(6) of the Code and it is unclear whether the provisions would be applicable to the Class A Notes in the absence of such regulations or whether use of a reasonable prepayment assumption may be required or permitted without reliance on these rules. If this provision applies to the Class A Notes, the amount of OID that will accrue in any given “accrual period” may either increase or decrease depending upon the actual prepayment rate of the Receivables. In the absence of such regulations (or statutory or other administrative clarification), any information reports or returns to the IRS and the U.S. Note Owners regarding OID, if any, will be based on the Prepayment Assumption, as explained above. For additional information, investors should refer to “Prepayment and Yield Considerations” and “Weighted Average Lives of the Notes” in this prospectus and consult with their own tax advisors regarding the impact of any prepayments of the Receivables and the OID rules if the Class A Notes are issued with OID.
Short-Term Notes. A U.S. Note Owner of a Class A Note that has a fixed maturity date of not more than one year from the issue date of that Class A Note (a “Short-Term Note”) may be subject to special rules. Accrual basis U.S. Note Owners of Short-Term Notes (and some cash method U.S. Note Owners of Short-Term Notes) are required to report interest income as interest accrues on a straight-line basis or under a constant yield method over the term of each interest period. Other cash method U.S. Note Owners of a Short-Term Note are required to report interest income as interest is paid (or, if earlier, upon the taxable disposition of the Short-Term Note). However, a cash method U.S. Note Owner of a Short-Term Note reporting interest income as it is paid may be required to defer a portion of any interest expense otherwise deductible on indebtedness incurred to purchase or carry the Short-Term Note until the taxable disposition of the Short-Term Note. A cash method U.S. Note Owner that is not required to report interest income as it accrues under the foregoing rules may elect to accrue interest income on all nongovernment debt obligations with a term of one year or less, in which case the U.S. Note Owner would not be
subject to the interest expense deferral rule referred to in the preceding sentence. Certain special rules apply if a Short-Term Note is purchased for more or less than its principal amount.
Market Discount. If a U.S. Note Owner purchases a Class A Note at a “market discount” (that is, at a purchase price less than the remaining stated redemption price at maturity of the Class A Note (or in the case of a Class A Note with OID, its adjusted issue price) which exceeds a de minimis amount specified in the Code), and thereafter (a) recognizes gain upon a disposition, or (b) receives payments of principal, the lesser of (i) such gain or principal payment or (ii) the accrued market discount will be taxed as ordinary interest income. Generally, the accrued market discount will be the total market discount on the related Class A Note multiplied by a fraction, the numerator of which is the number of days the U.S. Note Owner held such Note and the denominator of which is the number of days from the date the U.S. Note Owner acquired such Note until its maturity date. The U.S. Note Owner may elect, however, to determine accrued market discount under the constant-yield method. Any such election will apply to all debt instruments acquired by the U.S. Note Owner on or after the first day of the first taxable year to which such election applies.
A U.S. Note Owner that incurs or continues indebtedness to acquire a Class A Note at a market discount also may be required to defer the deduction of all or a portion of the interest on the indebtedness until the corresponding amount of market discount is included in income. A U.S. Note Owner that elects to include market discount in gross income as it accrues as described above is exempt from this rule. The adjusted basis of a Class A Note subject to such election will be increased to reflect market discount included in gross income, thereby reducing any gain or increasing any loss on a subsequent sale or taxable disposition.
Amortizable Bond Premium. In general, if a U.S. Note Owner purchases a Class A Note at a premium (generally, an amount in excess of the amount payable upon the maturity thereof), such U.S. Note Owner will be considered to have purchased such Class A Note with “amortizable bond premium” equal to the amount of such excess. The U.S. Note Owner may elect to amortize such amortizable bond premium as an offset to interest income and not as a separate deduction item as it accrues under a constant-yield method over the remaining term of the Class A Note. The U.S. Note Owner’s tax basis in the Class A Note will be reduced by the amount of the amortized bond premium. Any such election will apply to all debt instruments (other than instruments the interest on which is excludible from gross income) held by the U.S. Note Owner at, or that is acquired subsequent to, the beginning of the first taxable year for which the election applies and is irrevocable without the consent of the IRS. Bond premium on a Class A Note held by a U.S. Note Owner who does not elect to amortize the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the Class A Note.
Acquisition Premium. A U.S. Note Owner that purchases in a secondary market a Class A Note that was originally issued with OID, for an amount that is less than or equal to the sum of all amounts (other than payments of qualified stated interest) payable on the Class A Note after the purchase date but that is in excess of its adjusted issue price (such excess being “acquisition premium”) and that does not make the election described below, is permitted to reduce the daily portions of OID, if any, by a fraction, the numerator of which is the excess of the U.S. Note Owner’s adjusted basis in the Class A Note immediately after its purchase over the adjusted issue price of the Class A Note, and the denominator of which is the excess of the sum of all amounts payable on the Class A Note after the purchase date, other than payments of qualified stated interest, over the Class A Note’s adjusted issue price.
Election. A U.S. Note Owner may elect to include in gross income all interest that accrues on a Class A Note by using a constant yield method. For purposes of the election, the interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest as adjusted by any amortizable bond premium or acquisition premium. This election will generally apply only to the Class A Note with respect to which it is made and may not be revoked without the consent of the IRS. Potential U.S. Note Owners are encouraged to consult with their own tax advisors regarding the time and manner of making and the scope of the election and the implementation of the constant yield method.
Sale or Other Disposition. If a U.S. Note Owner sells a Class A Note, the U.S. Note Owner will recognize gain or loss in an amount equal to the difference between the amount realized on the sale and the U.S. Note Owner’s adjusted tax basis in the Class A Note. The adjusted tax basis of a Class A Note to a particular U.S. Note Owner will equal the U.S. Note Owner’s cost for the Class A Note, increased by any market discount, acquisition discount and OID previously included in income by that U.S. Note Owner with respect to the Class A Note and decreased by the amount of bond premium, if any, previously amortized and by the amount of payments of principal and OID previously received by that U.S. Note Owner with respect to that Class A Note. Any resulting gain or loss, and any
gain or loss recognized on a prepayment of the Class A Notes, will be capital gain or loss if the Class A Note was held as a capital asset, except for any gain representing accrued interest and accrued market discount not previously included in income. Except for an annual $3,000 exception applicable to individuals, capital losses may be used only to offset capital gains or gains treated as capital gains.
Potential Acceleration of Items of Income. A U.S. Note Owner that uses an accrual method of accounting for U.S. federal income tax purposes is generally required to include certain amounts in income no later than the time such amounts are taken into account as revenue on certain financial statements. The application of this rule thus may require the accrual of income earlier than would be the case under the general rules described above.
The United States Treasury has released regulations that exclude from this rule any item of gross income for which a taxpayer used a special method of accounting required by certain sections of the Code, including income subject to the timing rules for OID, income under the contingent payment debt instrument rules, income and gain associated with an integrated transaction, de minimis OID, accrued market discount, and de minimis market discount, provided that the taxpayer applied the regulations consistently to all items of income during such taxpayer’s taxable year. Prospective investors are encouraged to consult their tax advisors with regard to the application of these rules.
Net Investment Income. A tax of 3.8% is imposed on the “net investment income” of certain U.S. individuals, trusts and estates. Among other items, net investment income generally includes gross income from interest and net gain attributable to the disposition of certain property, less certain deductions. U.S. Note Owners of Class A Notes should consult their own tax advisors regarding the possible implications of this tax in their particular circumstances.
Tax Consequences to Foreign Note Owners
Except as described below with respect to backup withholding or FATCA (defined below), interest paid (or accrued) to a Foreign Note Owner will be considered “portfolio interest,” and will not be subject to U.S. federal income tax and withholding tax if the interest is not effectively connected with the conduct of a trade or business within the United States by the Foreign Note Owner and:
| 1. | the Foreign Note Owner is not actually or constructively a “10 percent shareholder” of the Issuing Entity or the Depositor (including a holder of 10% or more of the Certificate) or a “controlled foreign corporation” with respect to which the Issuing Entity or the Depositor is a “related person” within the meaning of the Code; |
| 2. | the Foreign Note Owner is not a bank receiving interest described in Section 881(c)(3)(A) of the Code; |
| 3. | the interest is not contingent interest as described in Section 871(h)(4) of the Code; and |
| 4. | the Foreign Note Owner does not bear any of certain specified relationships to any Certificateholder. |
To qualify for the portfolio interest exemption, the Foreign Note Owner must provide the applicable trustee or other person who is otherwise required to withhold U.S. tax with respect to the Class A Notes with an appropriate statement (on IRS Form W-8BEN or IRS Form W-8BEN-E or applicable similar or successor forms), signed under penalty of perjury, certifying that the Note Owner is a Foreign Note Owner and providing the Foreign Note Owner’s name and address. Interest paid to a Foreign Note Owner is also not subject to U.S. federal withholding tax if such interest is effectively connected with the conduct of a trade or business within the United States by the Foreign Note Owner and such Foreign Note Owner submits a properly executed IRS Form W-8ECI (or applicable successor form). If a Class A Note is held through a securities clearing organization or other financial institution, the organization or institution may provide the relevant signed statement to the withholding agent; in that case, however, the Foreign Note Owner must provide the security clearing organization or other financial institution with an IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8ECI or applicable similar or successor form. An IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI remains in effect for a period beginning on the date the form is signed and ending on the last day of the third succeeding calendar year, absent a change in circumstances causing any information on the form to be incorrect. However, under certain conditions, the IRS Form W-8BEN and IRS Form W-8BEN-E will remain in effect indefinitely until a change in circumstances occurs. The Foreign Note
Owner must notify the person to whom it provided the IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8ECI or applicable similar or successor form of any changes to the information on the Form or applicable similar or successor form. If interest paid to a Foreign Note Owner is not considered portfolio interest and is not effectively connected with the conduct of a trade or business within the United States by the Foreign Note Owner, then it will be subject to gross-basis U.S. federal income and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty. In order to claim the benefit of any applicable tax treaty, the Foreign Note Owner must provide the applicable trustee or other person who is required to withhold U.S. tax with respect to the Class A Notes with an appropriate statement (on IRS Form W-8BEN, IRS Form W-8BEN-E or applicable similar or successor form), signed under penalties of perjury, certifying that the Foreign Note Owner is entitled to benefits under the treaty.
Except as described below with respect to backup withholding or FATCA (as defined below), any capital gain realized on the sale, redemption, retirement or other taxable disposition of a Class A Note by a Foreign Note Owner will be exempt from U.S. federal income and withholding tax, provided that (1) the gain is not effectively connected with the conduct of a trade or business in the United States by the Foreign Note Owner and (2) in the case of an individual Foreign Note Owner, the Foreign Note Owner is not present in the United States for 183 days or more during the taxable year of disposition.
If interest paid to a Foreign Note Owner or gain on the sale, redemption, retirement or other taxable disposition of a Class A Note is effectively connected with the conduct of a trade or business within the United States by the Foreign Note Owner, then although the Foreign Note Owner will be exempt from the withholding of tax previously discussed if an appropriate statement is provided, such Foreign Note Owner generally will be subject to U.S. federal income tax on such interest, including OID, or gain at applicable graduated U.S. federal income tax rates. In addition, if the Foreign Note Owner is a foreign corporation, it may be subject to a branch profits tax equal to 30% of the “effectively connected earnings and profits” of such foreign corporation within the meaning of the Code for the taxable year, as adjusted for certain items, unless such Foreign Note Owner qualifies for a lower rate under an applicable tax treaty.
Backup Withholding. Each Note Owner (other than an exempt Note Owner such as a tax-exempt organization, qualified pension and profit-sharing trust, individual retirement account or nonresident alien who provides certification as to status as a nonresident) will be required to provide, under penalties of perjury, a certificate (on IRS Form W-9 or applicable successor form) providing the Note Owner’s name, address, correct federal taxpayer identification number (“TIN”) and a statement that the Note Owner is not subject to backup withholding. Should a nonexempt Note Owner fail to provide the required certification, amounts otherwise payable to the Note Owner may be subject to backup withholding tax, and the Issuing Entity will be required to withhold and remit the withheld amount to the IRS. Backup withholding is not an additional tax. Any such amount withheld would be credited against the Note Owner’s U.S. federal income tax liability.
Foreign Note Owners who have provided the applicable forms or certifications described above under “Tax Consequences to Note Owners—Foreign Note Owners” or who have otherwise established an exemption will not be subject to backup withholding if neither the Issuing Entity nor its agent has actual knowledge or reason to know that any information in such forms or certifications is unreliable or that the conditions of the exemption are not satisfied.
Possible Alternative Treatments of the Class A Notes. If, contrary to the opinion of Tax Counsel, the IRS successfully asserted that one or more of the Class A Notes did not represent debt for U.S. federal income tax purposes, the Class A Notes may be treated as equity interests in the Issuing Entity. If so treated, the Issuing Entity may be taxable as a corporation or publicly traded partnership with the adverse consequences described above (and the corporation or publicly traded partnership would not be able to reduce its taxable income by deductions for interest expense on Class A Notes recharacterized as equity). Alternatively, and most likely, in the view of Tax Counsel, the Issuing Entity may be treated as a partnership (including a publicly traded partnership) that would not be taxable as a corporation. Nonetheless, treatment of the Class A Notes as equity interests in a partnership or publicly traded partnership could have adverse tax consequences to some Note Owners. For example, income to some tax-exempt entities (including pension funds) may be treated as “unrelated business taxable income,” income to Foreign Note Owners may be subject to U.S. income tax and withholding taxes and cause Foreign Note Owners to be subject to U.S. tax return filing and withholding requirements, and individual Note Owners might be subject to some limitations on their ability to deduct their share of Issuing Entity expenses.
The IRS has issued Treasury regulations under Section 385 of the Code that in certain circumstances treat an instrument that otherwise would be treated as debt for U.S. federal income tax purposes as equity during periods in which the instrument is held by a member of an “expanded group” that includes the issuer of the instrument. An expanded group is generally a group of corporations or controlled partnerships connected through 80% or greater direct or indirect ownership links.
The Issuing Entity does not believe that these regulations will apply to any of the Class A Notes. However, the regulations are complex and have not yet been applied by the IRS or any court. If the Class A Notes were treated as equity under these rules, they may once again be treated as debt when acquired by a holder that is not a member of an expanded group including the Issuing Entity. Class A Notes treated as newly issued under this rule may have tax characteristics differing from Class A Notes that were not previously treated as equity. The Issuing Entity does not intend to separately track any such Class A Notes.
Potential investors in the Class A Notes should consult with their own tax advisors regarding the possible effect of the Section 385 regulations on them, including without limitation with regard to tax consequences where Class A Notes held by them are treated as having tax characteristics that differ from other Class A Notes.
Foreign Account Tax Compliance. In addition to the rules described above regarding the potential imposition of U.S. withholding taxes on payments to Foreign Note Owners, withholding taxes could also be imposed under the Foreign Account Tax Compliance Act (“FATCA”) regime. Under FATCA, foreign financial institutions (defined broadly to include, among other types of entities, hedge funds, private equity funds, mutual funds, securitization vehicles and other investment vehicles) must comply with information gathering and reporting rules with respect to their U.S. account holders and investors and may be required to enter into agreements with the IRS pursuant to which such foreign financial institutions must gather and report certain information to the IRS (or, pursuant to an applicable intergovernmental agreement, to their local tax authorities who will report such information to the IRS) and withhold U.S. tax from certain payments made by them. Foreign financial institutions that fail to comply with the FATCA requirements will be subject to a 30% withholding tax on U.S. source payments, including interest, OID and gross proceeds (subject to the caveat expressed in the penultimate sentence of this paragraph) from the sale of any equity or debt instruments of U.S. issuers. Payments of interest, OID and gross proceeds, (subject to the caveat expressed in the penultimate sentence of this paragraph) to foreign non-financial entities will also be subject to a gross basis withholding tax of 30% if the entity does not certify that it does not have any substantial U.S. owner or provide the name, address and TIN of each substantial U.S. owner. The FATCA withholding tax will apply regardless of whether the payment would otherwise be exempt from U.S. nonresident withholding tax (e.g., under the portfolio interest exemption or as capital gain) and regardless of whether the foreign financial institution is the beneficial owner of such payment. Notwithstanding the foregoing, the IRS has issued proposed regulations, upon which taxpayers may generally rely until the issuance of final regulations, that exclude gross proceeds from the sale or other disposition of the Class A Notes from the application of the withholding tax imposed under FATCA. Prospective investors should consult their own tax advisors regarding FATCA and any effect on them.
Reportable Transactions. A penalty in the amount of $10,000 in the case of a natural person and $50,000 in any other case is imposed on any taxpayer that fails to timely file an information return with the IRS with respect to a “reportable transaction” (as defined in Section 6011 of the Code). The rules defining “reportable transactions” are complex but include (and are not limited to) transactions that result in certain losses that exceed threshold amounts. Prospective investors are advised to consult their own tax advisers regarding any possible disclosure obligations in light of their particular circumstances.
CERTAIN STATE TAX CONSEQUENCES
The above discussion does not address the tax treatment of the Issuing Entity, any Notes or any Note Owners under any state or local tax laws. The activities to be undertaken by the Servicer in servicing and collecting the Receivables will take place in various states and, therefore, many different state and local tax regimes potentially apply to different portions of these transactions. Prospective investors are urged to consult with their tax advisors regarding the state and local tax treatment of the Issuing Entity as well as any state and local tax consequences for them purchasing, holding and disposing of Notes or the Certificate.
You should consult your tax advisor with respect to the tax consequences to you of the purchase, ownership and disposition of Notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in U.S. federal or other tax laws.
WHERE YOU CAN FIND MORE INFORMATION ABOUT YOUR NOTES
The Issuing Entity
The Indenture Trustee will provide to Noteholders (which will be Cede & Co. as the nominee of DTC unless Definitive Notes are issued under the limited circumstances described in this prospectus) unaudited monthly and annual reports concerning the Receivables and certain other matters. For additional information, you should refer to “Description of the Notes—Reports to Securityholders” and “Transfer and Servicing Agreements—Evidence as to Compliance” in this prospectus. Copies of such reports may be obtained at no charge.
The Depositor
The Depositor has filed with the SEC the Registration Statement under the Securities Act of which this prospectus forms a part. This prospectus does not contain all the information contained in the Registration Statement. The Depositor has satisfied the registrant requirements for use of Form SF-3 contained in General Instruction I.A.1 of Form SF-3. The SEC maintains a website (http://www.sec.gov) that contains reports, registration statements and other information regarding issuers that file electronically with the SEC using the SEC’s Electronic Data Gathering Analysis and Retrieval system (commonly known as EDGAR). The Registration Statement and all reports filed by the Depositor may be found on EDGAR, filed under the name of the Depositor and under the SEC Central Index Key set forth on the front cover of this prospectus, and all reports filed with respect to the Issuing Entity will be filed under registration file number 333-228027-11. Copies of the transaction agreements relating to the Notes will also be filed with the SEC on EDGAR under the registration number shown above.
For the time period that the Issuing Entity is required to report under the Exchange Act, the Depositor, on behalf of the Issuing Entity, will file the reports required under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act. These reports include (but are not limited to):
| • | Reports on Form 8-K (Current Report), including as exhibits thereto the transaction agreements; |
| • | Reports on Form 8-K (Current Report) following the occurrence of events specified in Form 8-K requiring disclosure, which are required to be filed within the time-frame specified in Form 8-K related to the type of event; |
| • | Reports on Form 10-D (Asset-Backed Issuer Distribution Report) containing the distribution and pool performance information required on Form 10-D, which are required to be filed 15 days following each Payment Date; |
| • | Reports on Form ABS-EE (Submission of Electronic Exhibits for Asset-Backed Securities), including as exhibits thereto monthly asset-level data for the related Collection Period and the Receivables, which exhibits will be incorporated by reference into the related Form 10-D; and |
| • | Report on Form 10-K (Annual Report) containing the items specified in Form 10-K with respect to a fiscal year, and the items required pursuant to Items 1122 and 1123 of Regulation AB of the Exchange Act. |
Unless specifically stated in such a report, neither the report nor any information included in such report will be examined or reported on by an independent public accountant.
The distribution and pool performance reports filed on Form 10-D will be forwarded to each Securityholder as specified under “Description of the Notes—Reports to Securityholders” in this prospectus. The Depositor will post these reports on its website located at “www.toyotafinancial.com” as soon as reasonably practicable after such reports are filed with the SEC.
UNDERWRITING
Subject to the terms and conditions described in the underwriting agreement, the Depositor has agreed to sell to each of the underwriters named below (collectively, the “Underwriters”), and each of the Underwriters has severally agreed to purchase the aggregate initial principal amounts of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes (collectively, the “Underwritten Notes”) described opposite its name below:
| | | Principal
Amount of
Class A-1 Notes | | Principal
Amount of
Class A-2 Notes | | Principal
Amount of
Class A-3 Notes | | Principal
Amount of
Class A-4 Notes |
Barclays Capital Inc. | | $133,760,000 | | $200,640,000 | | $200,640,000 | | $ 57,760,000 |
| BNP Paribas Securities Corp. | | $ 60,192,000 | | $ 90,288,000 | | $ 90,288,000 | | $ 25,992,000 |
| Mizuho Securities USA LLC | | $ 60,192,000 | | $ 90,288,000 | | $ 90,288,000 | | $ 25,992,000 |
| Santander Investment Securities Inc. | | $ 60,192,000 | | $ 90,288,000 | | $ 90,288,000 | | $ 25,992,000 |
| HSBC Securities (USA) Inc. | | $ 10,032,000 | | $ 15,048,000 | | $ 15,048,000 | | $ 4,332,000 |
| ING Financial Markets LLC | | $ 10,032,000 | | $ 15,048,000 | | $ 15,048,000 | | $ 4,332,000 |
Total | | $334,400,000 | | $501,600,000 | | $501,600,000 | | $144,400,000 |
The Depositor has been advised by the Underwriters that they propose initially to offer the Underwritten Notes to the public at the prices described in this prospectus. The underwriting discounts and commissions, the selling concessions that the Underwriters may allow to certain dealers, and the discounts that such dealers may reallow to certain other dealers, each expressed as a percentage of the principal amount of the related class of Underwritten Notes and as an aggregate dollar amount, will be as follows:
| | | Underwriting Discount and Commissions | | Net Proceeds to the Depositor(1) | | Selling Concessions Not to Exceed(2) | | Reallowance Not to Exceed |
Class A-1 Notes | | 0.050% | | 99.95000% | | 0.030% | | 0.015% |
Class A-2 Notes | | 0.200% | | 99.79244% | | 0.120% | | 0.060% |
Class A-3 Notes | | 0.250% | | 99.74203% | | 0.150% | | 0.075% |
Class A-4 Notes | | 0.300% | | 99.66574% | | 0.180% | | 0.090% |
| Total for the Notes | | $2,857,600 | | $1,479,015,030 | | | | |
____________________
| (1) | Before deducting expenses estimated to be $1,000,000. |
| (2) | In the event of possible sales to affiliates, one or more of the underwriters may be required to forego a de minimis portion of the selling concession they would otherwise be entitled to receive. |
The closing of the sale of any class of the Notes will be conditioned on the closing of the sale of all other classes of the Notes. After the initial public offering of the Underwritten Notes, the public offering prices and the concessions may change. To the extent any Underwriter that is not a United States registered broker-dealer intends to effect any offers or sales of any Underwritten Notes in the United States, it will do so through one or more United States registered broker-dealers in accordance with the applicable United States securities laws and regulations.
Until the distribution of the Underwritten Notes is completed, rules of the SEC may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Underwritten Notes. As an exception to these rules, the Underwriters are permitted to engage in certain transactions to stabilize the price of the Underwritten Notes. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Underwritten Notes.
If the Underwriters create a short position in the Underwritten Notes in connection with this offering, (i.e., they sell more Underwritten Notes than are described on the front cover of this prospectus), the Underwriters may reduce that short position by purchasing Underwritten Notes in the open market.
The Underwriters may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Underwriters purchase Underwritten Notes in the open market to reduce the Underwriters’ short position or to stabilize the price of the Underwritten Notes, they may reclaim the amount of the selling concession from any Underwriter or selling group member who sold those Underwritten Notes as part of the offering.
In general, purchases of a security for the purposes of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security.
Neither the Sponsor nor the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that any of the transactions described above may have on the price of the Underwritten Notes. In addition, neither the Sponsor nor any of the Underwriters make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
The Underwritten Notes are new issues of securities and there currently is no secondary market for the Underwritten Notes. The Underwriters for the Underwritten Notes expect to make a market in the Underwritten Notes but will not be obligated to do so. There is no assurance that a secondary market for the Underwritten Notes will develop. If a secondary market for the Underwritten Notes does develop, it might end at any time or it might not be sufficiently liquid to enable you to resell any of your Underwritten Notes.
The Indenture Trustee may, from time to time, invest the funds in the Collection Account and the Reserve Account at the direction of the Servicer and the Depositor, in investments acquired from or issued by the Underwriters. As of the date of this prospectus, the Indenture Trustee is an affiliate of U.S. Bancorp Investments, Inc., one of the Underwriters.
In the ordinary course of business, the Underwriters and their affiliates have engaged and may engage in investment banking and commercial banking transactions with the Servicer and its affiliates.
The Sponsor and the Depositor have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act or to contribute to payments which the Underwriters may be required to make in respect thereof.
Under Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle within two business days, unless the parties thereto expressly agree otherwise. Accordingly, purchasers who wish to trade the Underwritten Notes more than two business days prior to the expected delivery date will be required to specify an alternate settlement cycle at the time of any such trade to avoid a failed settlement.
The Class B Notes and approximately, but not less than, 5% (by aggregate initial principal amount) of each of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes will not be sold to the Underwriters under the underwriting agreement on the Closing Date. Any Notes which are retained by the Depositor on the Closing Date are referred to herein, collectively, as “Retained Notes.”
The Retained Notes will be retained initially by the Depositor, but, to the extent not necessary to satisfy credit risk retention requirements described under “The Sponsor, Administrator and Servicer––Credit Risk Retention” in this prospectus, may subsequently be sold directly, including through a placement agent (including TFSS USA), or through underwriters, in one or more negotiated transactions or otherwise at varying prices to be determined at the time of sale. Any underwriters or placement agents that participate in the distribution of any class of Retained Notes retained or purchased by the Depositor or an affiliate of the Depositor may be deemed to be “underwriters” within the meaning of the Securities Act and any profit on the sale of those Notes by them and any discounts, commissions, concessions or other compensation received by any of them may be deemed to be underwriting discounts and commissions under the Securities Act.
TFSS USA is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) (formerly known as the National Association of Securities Dealers, Inc., or NASD). The principal business of TFSS USA is to sell debt securities of its affiliates, including those of TMCC. TFSS USA is an affiliate of TMCC and may participate as a placement agent in the distribution of any Retained Notes offered pursuant to this prospectus. Rule 2720 of the NASD Conduct Rules imposes certain requirements when a FINRA member such as TFSS USA distributes an affiliated company’s securities. Any offering of Retained Notes using this prospectus in which TFSS USA participates will be made in compliance with the applicable requirements of Rule 2720. Subject to the terms and conditions described in an agreement among the Depositor, the Sponsor and TFSS USA, TFSS USA has agreed to act as a placement agent in the offering of any Retained Notes, if requested by the Depositor or an affiliate of the Depositor.
European Economic Area
Each Underwriter has represented and agreed that it has not offered, sold or otherwise made available and will not offer, sell or otherwise make available any Notes to any EU retail investor in the European Economic Area (the “EEA”). For the purposes of this provision:
| (a) | the expression “EU retail investor” means a person who is one (or more) of the following: |
| (i) | a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or |
| (ii) | a customer within the meaning of Directive (EU) 2016/97 (as amended), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or |
| (iii) | not a qualified investor as defined in Regulation (EU) 2017/1129 (as amended); and |
| (b) | the expression “offer” includes the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes. |
United Kingdom
Each Underwriter has represented and agreed that:
| (a) | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended (the “FSMA”)) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuing Entity or the Depositor; and |
| (b) | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the UK. |
Each Underwriter has also represented and agreed that it has not offered, sold or otherwise made available and will not offer, sell or otherwise make available any Notes to any UK retail investor in the UK. For the purposes of this provision:
| (a) | the expression “UK retail investor” means a person who is one (or more) of the following: |
| (i) | a retail client, as defined in point (8) of Article 2 of Commission Delegated Regulation (EU) 2017/565 as it forms part of the domestic law of the UK by virtue of the European Union (Withdrawal) Act 2018 (as amended, the “EUWA”), and as amended; or |
| (ii) | a customer within the meaning of the provisions of the FSMA and any rules or regulations made under the FSMA to implement Directive (EU) 2016/97 (as amended), where that customer would not qualify as a professional client, as defined in point (8) of Article 2(1) of Regulation (EU) No 600/2014 as it forms part of the domestic law of the UK by virtue of the EUWA, and as amended; or |
| (iii) | not a qualified investor as defined in Article 2 of Regulation (EU) 2017/1129 as it forms part of the domestic law of the UK by virtue of the EUWA, and as amended; and |
| (b) | the expression “offer” includes the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes. |
EU SECURITIZATION REGULATION AND UK SECURITIZATION REGULATION
Regulation (EU) 2017/2402 of the European Parliament and of the Council of December 12, 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation and amending certain other EU directives and regulations (as amended and as in effect on September 15, 2021, the “EU Securitization Regulation”) places certain conditions on investments in a "securitisation" (as defined in the EU Securitization Regulation) by any “institutional investor” which for these purposes includes (a) a credit institution or an investment firm as defined in and for purposes of Regulation (EU) No. 575/2013, as amended, known as the Capital Requirements Regulation (the “CRR”), (b) an insurance undertaking or a reinsurance undertaking as defined in Directive 2009/138/EC, as amended, known as Solvency II, (c) an alternative investment fund manager (AIFM) as defined in Directive 2011/61/EU that manages or markets alternative investment funds in the EU, (d) an undertaking for collective investment in transferable securities (UCITS) management company, as defined in Directive 2009/65/EC, as amended, known as the UCITS Directive, or an internally managed UCITS, which is an investment company that is authorized in accordance with that Directive and has not designated such a management company for its management, and (e) with certain exceptions, an institution for occupational retirement provision (IORP) falling within the scope of Directive (EU) 2016/2341, or an investment manager or an authorized entity appointed by such an institution for occupational retirement provision as provided in that Directive. Pursuant to Article 14 of the CRR, the EU Investor Requirements apply also to investments by certain consolidated affiliates, wherever established or located, of institutions regulated under the CRR (such affiliates, together with all institutional investors established in the EU, “EU Affected Investors”). The EU Securitization Regulation is directly applicable to member states of the European Union (the “EU”) and will be applicable in any non-EU states of the EEA in which it has been implemented.
Article 5 of the EU Securitization Regulation provides that, prior to investing in (or otherwise holding an exposure to) a “securitisation position” (as defined in the EU Securitization Regulation) (the “EU Investor Requirements”), an EU Affected Investor, other than the originator, sponsor or original lender (each as defined in the EU Securitization Regulation) must, among other things: (a) verify that, where the originator or original lender is established in a third country (that is, not within the EU), the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness, (b) verify that, where the originator, sponsor or original lender is established in a third country (that is not within the EU), the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in the securitization which, in any event, shall not be less than 5%, determined in accordance with Article 6 of the EU Securitization Regulation, and discloses the risk retention to institutional investors, (c) verify that the originator, sponsor or securitization special purpose entity (“SSPE”) has, where applicable, made available the information required by Article 7 of the EU Securitization Regulation (which sets out transparency requirements for originators, sponsors and SSPEs) in accordance with the frequencies and modalities provided for thereunder, and (d) carry out a due-diligence assessment which enables the institutional investor to assess the risks involved, considering at least (i) the risk characteristics of the securitisation position and the underlying exposures, and (ii) all the structural features of the securitization that can materially impact the performance of the securitisation position. While holding a securitisation position, an institutional investor must also (a) establish appropriate written procedures in order to monitor, on an ongoing basis, its compliance with the foregoing requirements and the performance of the securitisation position and of the underlying exposures, (b) regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures, (c) ensure internal reporting to its management body to enable adequate management of material risks, and (d) be able to demonstrate to its regulatory authorities that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and has implemented written policies and procedures for managing risks of the securitisation position and maintaining records of the foregoing verifications and due diligence and other relevant information.
Certain aspects of the requirement for an originator, sponsor or original lender to retain a material net economic interest in accordance with Article 6 of the EU Securitization Regulation are to be further specified in regulatory technical standards to be prepared by the European Banking Authority and adopted by the European Commission as a delegated regulation. The European Banking Authority published a draft of those regulatory technical standards on July 31, 2018 and, following certain amendments to the EU Securitization Regulation, published a consultation paper with amended draft regulatory technical standards in relation to risk retention on June 30, 2021. Those regulatory technical standards have not yet been finalized and consequently have not yet been adopted by the European Commission or published in final form. Until they come into force, the provisions of
Article 3(4) of Commission Delegated Regulation (EU) No. 625/2014 of 13 March 2014 (the “EU Transitional Retention RTS”) apply in lieu thereof. It remains unclear what will be required for institutional investors to demonstrate compliance with the various due diligence requirements under Article 5 of the EU Securitization Regulation.
The EU Securitization Regulation (as amended), together with all relevant implementing regulations in relation thereto, all regulatory standards and/or implementing technical standards in relation thereto or applicable in relation thereto pursuant to any transitional arrangements made pursuant to the EU Securitization Regulation, and in each case, any relevant guidance and directions published in relation thereto by the European Banking Authority or the European Securities and Markets Authority or the European Insurance and Occupational Pensions Authority (or, in each case, any predecessor or any other applicable regulatory authority) or by the European Commission, in each case, as amended and in effect from time to time are referred to in this prospectus as the “EU Securitization Rules.”
On the basis disclosed in “The Sponsor, Administrator and Servicer—Credit Risk Retention—EU and UK Risk Retention” in this prospectus, TMCC, in its capacity as ‘originator’, will agree to retain, on an ongoing basis, a material net economic interest of not less than 5% of the nominal value of each of the tranches sold or transferred to investors within the meaning of paragraph 3(a) of Article 6 of the EU Securitization Regulation by retaining, either directly or indirectly through the Depositor (its wholly-owned subsidiary that is a special purpose entity and not an operating company), at least 5% (by aggregate initial principal amount) of each class of the Notes.
However, except as described in this prospectus under “The Sponsor, Administrator and Servicer—Credit Risk Retention—EU and UK Risk Retention,” no party to the securitization transaction described in this prospectus is required, or intends, to take or refrain from taking any action with regard to such transaction in a manner prescribed or contemplated by the EU Securitization Rules, or to take any action for purposes of, or in connection with, compliance by any investor with any applicable EU Securitization Rules. In particular, the securitization transaction described in this prospectus is not being structured to ensure compliance by any person with the transparency and reporting requirements in Article 7 of the EU Securitization Regulation. Where applicable, Article 7 of the EU Securitization Regulation requires, among other things, that the originator, sponsor or SSPE satisfy ongoing reporting, including quarterly asset-level reporting using prescribed reporting templates, quarterly investor reporting using prescribed reporting templates and ad-hoc reporting of significant events.
Each prospective investor that is an EU Affected Investor is required to independently assess and determine whether the agreement by TMCC to retain the SR Retained Interest as described in this prospectus, and the information to be provided in the monthly servicer statements to be made available to Noteholders on an ongoing basis, as described under “Description of the Notes—Reports to Securityholders” in this prospectus, are sufficient for the purposes of complying with the EU Securitization Rules and any corresponding national measures which may be relevant, and none of TMCC, its affiliates nor any other party to the securitization transaction described in this prospectus makes any representation that such agreement and such information are sufficient for any such purpose. Prospective investors that are EU Affected Investors should be aware that the interpretation of the applicable EU Investor Requirements remains uncertain and that supervisory authorities and national regulators may have different views of how the EU Investor Requirements should be interpreted and those views are still evolving.
Pursuant to the EUWA, the EU Securitization Regulation as applicable on December 31, 2020 was retained as part of the domestic law of the UK and was amended by the Securitisation (Amendment) (EU Exit) Regulations 2019 (as so retained and so amended and as further amended from time to time, the “UK Securitization Regulation”).
The UK Securitization Regulation places certain conditions on investments in a “securitization” (as defined in the UK Securitization Regulation) (the “UK Investor Requirements” and, together with the EU Investor Requirements, the “Investor Requirements”) by any “institutional investor” which for these purposes includes (a) an insurance undertaking as defined in section 417(1) of the FSMA; (b) a reinsurance undertaking as defined in section 417(1) of the FSMA; (c) an occupational pension scheme as defined in section 1(1) of the Pension Schemes Act 1993 that has its main administration in the UK, or a fund manager of such a scheme appointed under section 34(2) of the Pensions Act 1995 that, in respect of activity undertaken pursuant to that appointment, is authorized for the purposes of section 31 of the FSMA; (d) an AIFM as defined in regulation 4(1) of the Alternative Investment Fund Managers Regulations 2013 which markets or manages AIFs (as defined in regulation 3 of those regulations) in the UK; (e) a management company as defined in section 237(2) of the FSMA; (f) a UCITS as defined by section 236A of the FSMA, which is an authorised open ended investment company as defined in section 237(3) of the FSMA and (g) a CRR firm as defined by Article 4(1)(2A) of Regulation (EU) No. 575/2013 as it forms part of the domestic law
of the UK by virtue of the EUWA The UK Investor Requirements apply also to investment by certain consolidated affiliates, wherever established or located, of such CRR firms (such affiliates, together with all such institutional investors, the “UK Affected Investor” and, together with the EU Affected Investor, the “Affected Investors”).
Article 5 of the UK Securitization Regulation provides that, prior to investing in (or otherwise holding an exposure to) a “securitization position” (as defined in the UK Securitization Regulation), UK Affected Investors, other than the originator, sponsor or original lender (each as defined in the UK Securitization Regulation) must, among other things: (a) verify that, where the originator or original lender is not established in the UK, the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness, (b) verify that, if the originator, sponsor or original lender is established in the UK, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5%, determined in accordance with Article 6 of the UK Securitization Regulation, and discloses the risk retention to institutional investors, (c) verify that the originator, sponsor or SSPE has, if not established in the UK, where applicable made available information which is substantially the same as the information required by Article 7 of the UK Securitization Regulation (which sets out transparency requirements for originators, sponsors and SSPEs) with such frequency and modalities as are substantially the same as those provided for in Article 7 of the UK Securitization Regulation, and (d) carry out a due-diligence assessment which enables the institutional investor to assess the risks involved, considering at least (i) the risk characteristics of the securitisation position and the underlying exposures, and (ii) all the structural features of the securitisation that can materially impact the performance of the securitisation position. While holding a securitisation position, an institutional investor must also (a) establish appropriate written procedures in order to monitor, on an ongoing basis, its compliance with the foregoing requirements and the performance of the securitisation position and of the underlying exposures, (b) regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures, (c) ensure internal reporting to its management body to enable adequate management of material risks, and (d) be able to demonstrate to its regulatory authority that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and has implemented written policies and procedures for managing risks of the securitisation position and maintaining records of the foregoing verifications and due diligence and other relevant information.
Certain aspects of the requirement for an originator, sponsor or original lender to retain a material net economic interest in accordance with Article 6 of the UK Securitization Regulation are required to be specified in technical standards jointly prepared by the Financial Conduct Authority and the Prudential Regulation Authority and, until so made, the provisions of the EU Transitional Retention RTS, as they form part of the domestic law of the UK by virtue of EUWA, apply in lieu thereof. It remains unclear what will be required for institutional investors to demonstrate compliance with the various due diligence requirements (and in particular in relation to the transparency and disclosure verification requirements applicable) under Article 5 of the UK Securitization Regulation, and whether the limited information that will be provided to Noteholders in relation to this securitization transaction is or will be sufficient to meet such requirements, and also what view the relevant UK regulator of any UK Affected Investor might take. Prospective investors that are UK Affected Investors should note that there are substantive differences between the transparency and disclosure verification requirements of Article 5 of the EU Securitization Regulation and those of Article 5 of the UK Securitization Regulation and that there is uncertainty as to the implications of such differences.
The UK Securitization Regulation (as amended), together with (a) all applicable binding technical standards made under the UK Securitization Regulation, (b) any EU regulatory technical standards or implementing technical standards relating to the EU Securitization Regulation (including without limitation such regulatory technical standards or implementing technical standards which are applicable pursuant to any transitional provisions of the EU Securitization Regulation) forming part of the domestic law of the UK by operation of the EUWA, (c) all relevant guidance, policy statements or directions relating to the application of the UK Securitization Regulation (or any binding technical standards) published by the Financial Conduct Authority and/or the Prudential Regulation Authority (or their successors), (d) any guidelines relating to the application of the EU Securitization Regulation which are applicable in the UK, (e) any other transitional, saving or other provision relevant to the UK Securitization Regulation by virtue of the operation of the EUWA and (f) any other applicable laws, acts, statutory instruments, rules, guidance or policy statements published or enacted relating to the UK Securitization Regulation, in each case, as may be further amended, supplemented or replaced from time to time are referred to in this
prospectus as the “UK Securitization Rules” and together with the EU Securitization Rules, the “Securitization Rules”).
On the basis disclosed in “The Sponsor, Administrator and Servicer—Credit Risk Retention—EU and UK Risk Retention” in this prospectus, TMCC, in its capacity as ‘originator’, will agree to retain, on an ongoing basis, a material net economic interest of not less than 5% of the nominal value of each of the tranches sold or transferred to investors within the meaning of paragraph (a) of Article 6(3) of the UK Securitization Regulation by retaining, either directly or indirectly through the Depositor (its wholly-owned subsidiary that is a special purpose entity and not an operating company), at least 5% (by aggregate initial principal amount) of each class of the Notes.
However, except as described or referred to above or in this prospectus under “The Sponsor, Administrator and Servicer—Credit Risk Retention—EU and UK Risk Retention” no party to the securitization transaction described in this prospectus is required, or intends, to take or refrain from taking any action with regard to such transaction in a manner prescribed or contemplated by the UK Securitization Rules, or to take any action for purposes of, or in connection with, compliance by any investor with any applicable UK Securitization Rules. In particular, the securitization transaction described in this prospectus is not being structured to ensure compliance by any person with the transparency and reporting requirements in Article 7 of the UK Securitization Regulation. Where applicable, Article 7 of the UK Securitization Regulation requires, among other things, that the originator, sponsor or SSPE satisfy ongoing reporting, including quarterly asset-level reporting using prescribed reporting templates, quarterly investor reporting using prescribed reporting templates and ad-hoc reporting of significant events.
Each prospective investor that is a UK Affected Investor is required to independently assess and determine whether the agreement by TMCC to retain the SR Retained Interest as described in this prospectus, and the information to be provided in the monthly servicer statements to be made available to Noteholders on an ongoing basis, as described under “Description of the Notes—Reports to Securityholders” in this prospectus, are sufficient for the purposes of complying with the UK Securitization Rules and, in particular, whether, where applicable, such information is substantially the same as the information required by Article 7 of the UK Securitization Regulation and whether the frequency and modalities of such reports are substantially the same as those provided for in Article 7 of the UK Securitization Regulation, and none of TMCC, its affiliates nor any other party to the securitization transaction described in this prospectus makes any representation that such agreement and such information are sufficient for any such purpose. Prospective investors that are Affected Investors should be aware that the interpretation of the applicable Investor Requirements remains uncertain and that supervisory authorities and national regulators may have different views of how the applicable Investor Requirements should be interpreted and those views are still evolving.
Except as described herein, no party to the transaction described in this prospectus is required by the transaction documents, or intends, to take or refrain from taking any action with regard to such transaction in a manner prescribed or contemplated by the EU Securitization Rules or the UK Securitization Rules, or to take any action for purposes of, or in connection with, facilitating or enabling compliance by any investor with the EU Investor Requirements or the UK Investor Requirements, or any corresponding national measures that may be relevant.
Failure by an Affected Investor to comply with the applicable Investor Requirements with respect to an investment in the Notes may result in the imposition of a penalty regulatory capital charge on that investment or of other regulatory sanctions or measures. The Securitization Rules and any other changes to the regulation or regulatory treatment of the Notes for some or all investors may negatively impact the regulatory position of Noteholders or prospective investors and may have an adverse impact on the value and liquidity of the Notes offered by this prospectus. Prospective investors are responsible for and should analyze their own legal and regulatory position, and are encouraged to consult with their own investment and legal advisors, regarding scope and application of and compliance with any applicable Investor Requirements or other applicable regulations and the suitability of the Notes for investment. See “Risk Factors—Risks Primarily Related to the Nature of the Notes and the Structure of the Transaction—The notes may not be suitable investments for investors subject to the EU Securitization Rules or the UK Securitization Rules, and such rules could have an adverse impact on the value and liquidity of the notes.”
Any changes in the law or regulation, the interpretation or application of any law or regulation or changes in the regulatory capital treatment of the Notes for some or all investors may negatively impact the regulatory position of individual investors and, in addition, may have a negative impact on the price and liquidity of the Notes
in the secondary market. Without limitation to the foregoing, no assurance can be given that the EU Securitization Regulation, the UK Securitization Regulation or, in either case, the interpretation or application of any aspect thereof, will not change, and, if any such change is effected, whether such change would affect the regulatory position of current or future investors in the Notes. TMCC does not have an obligation to change the quantum or nature of its holding of the SR Retained Interest due to any future changes in the EU Securitization Regulation, the UK Securitization Regulation or, in either case, in the interpretation thereof.
LEGAL OPINIONS
In addition to the legal opinions described in this prospectus, certain legal matters relating to the Notes and certain U.S. federal income tax and other matters will be passed upon for the Issuing Entity by Morgan, Lewis & Bockius LLP. Certain legal matters relating to the Notes will be passed upon for the Underwriters by Mayer Brown LLP.
INDEX OF TERMS
